Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

#### **Washington, D.C. 20549**

####  

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# **Form 10-Q**

 
| **x**                                                                                                                                                                                                                                                                                                                                     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                |
| **For the quarterly period ended June 30,  2009**                                                                                                                                                                                                                                                                                    |
| ** **                                                                                                                                                                                                                                                                                                                                | ** **                                                                                              |
| **o**                                                                                                                                                                                                                                                                                                                                     | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                |
| **For the transition period from                            to                         ** |
| ** **                                                                                                                                                                                                                                                                                                                                | ** **                                                                                              |
| **Commission file number 001-16265**                                                                                                                                                                                                                                                                                                      |

 

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**LIMEENERGY CO.**(Exact name of registrant as specified in its charter)

 

| **Delaware**  (State or other jurisdiction of incorporation or organization) | ** ** | **36-4197337**

(I.R.S. Employer Identification No.) |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|

 

**1280 Landmeier Road, Elk Grove Village, Illinois60007-2410**(Address of principal executive offices, including zip code)

 

**(847) 437-1666**(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x  No o

 

Indicate by check mark whether theregistrant has submitted electronically and posted on its corporate Web site,if any, everyInteractive DataFile required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) duringthepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

| Large Accelerated Filer o |   | Accelerated Filer o         |
|--------------------------------|--------|-----------------------------|
|                           |   |                        |
| Non-Accelerated Filer o        |   | Smaller reporting company x |

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes o  No x

 

17,354,461shares of the registrant’s common stock, $.0001 par value per share, wereoutstanding as of August 11, 2009.

 

 

 

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Tableof Contents

 

**LIMEENERGY CO.**

**FORM 10-Q**

For The QuarterEnded June 30, 2009

 

#### INDEX

####  

| ** **    | ** **                                                                                                     | **Page**   |
|---------------|----------------------------------------------------------------------------------------------------------------|------------|
| ** **    | ** **                                                                                                     | **Number** |
|          |                                                                                                           |       |
| Part I   | Financial Information                                                                                          |       |
|          |                                                                                                           |       |
| ITEM  1.      | Financial Statements:                                                                                          |       |
|          |                                                                                                           |       |
|          | Condensed  Consolidated Balance Sheets June 30, 2009 (unaudited) and  December 31, 2008              | 1          |
|          |                                                                                                           |       |
|          | Condensed  Consolidated Statements of Operations Three months Ended June 30, 2009  and 2008 (unaudited)   | 3          |
|          |                                                                                                           |       |
|          | Condensed  Consolidated Statements of Operations Six months Ended June 30, 2009 and  2008 (unaudited)     | 4          |
|          |                                                                                                           |       |
|          | Condensed Consolidated Statement of Stockholders’  Equity Six months Ended June 30, 2009 (unaudited) | 5          |
|          |                                                                                                           |       |
|          | Condensed Consolidated Statements of Cash Flows Six  months Ended June 30, 2009 and 2008 (unaudited)      | 6          |
|          |                                                                                                           |       |
|          | Notes to Condensed Consolidated Financial Statements                                                           | 8          |
|          |                                                                                                           |       |
| ITEM 2.       | Management’s Discussion and Analysis  of Financial Condition and Results of Operations                    | 22         |
|          |                                                                                                           |       |
| ITEM 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                    | 34         |
|          |                                                                                                           |       |
| ITEM 4.       | Controls and  Procedures                                                                                       | 34         |
|          |                                                                                                           |       |
| Part II. | Other Information                                                                                              |       |
|          |                                                                                                           |       |
| ITEM 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                   | 35         |
|          |                                                                                                           |       |
| ITEM 4.       | Submissions  of Matters to a Vote of Security Holders                                                          | 36         |
|          |                                                                                                           |       |
| ITEM  6.      | Exhibits                                                                                                       | 37         |
|          |                                                                                                           |       |
|          | Signatures                                                                                                     | 37         |

 

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Table of Contents

 

#### PART I - FINANCIAL INFORMATION

####  

ITEM1. Financial Statements

 

**Lime Energy Co.**

**Condensed ConsolidatedBalance Sheets**

 
| ** **                                                                   | ** ** | **June 30** | ** **           | ** **           | ** ** |
|------------------------------------------------------------------------------|------------|------------------|----------------------|----------------------|------------|
| ** **                                                                   | ** ** | **2009**         | ** **           | **December 31** | ** ** |
| ** **                                                                   | ** ** | **(unaudited)**  | ** **           | **2008****(1)**      | ** ** |
|                                                                         |       |             |                 |                 |       |
| **Assets**                                                                   |       |             |                 |                 |       |
|                                                                         |       |             |                 |                 |       |
| **Current assets**                                                           |       |             |                 |                 |       |
| Cash  and cash equivalents                                                   | ** ** | **$**            | **4,673,040**        | ** **           | **$**      | **3,733,540** | ** ** |
| Accounts  receivable, net                                                    | ** ** | **19,665,755**   | ** **           | **24,226,968**       | ** ** |
| Inventories                                                                  | ** ** | **143,392**      | ** **           | **665,045**          | ** ** |
| Costs  and estimated earnings in excess of billings on uncompleted contracts | ** ** | **4,842,337**    | ** **           | **4,078,273**        | ** ** |
| Prepaid  expenses and other                                                  | ** ** | **857,474**      | ** **           | **1,417,925**        | ** ** |
| **Total Current Assets**                                                     | ** ** | **30,181,998**   | ** **           | **34,121,751**       | ** ** |
| ** **                                                                   | ** ** | ** **       | ** **           | ** **           | ** ** |
| **Net Property and Equipment**                                               | ** ** | **2,014,954**    | ** **           | **2,081,311**        | ** ** |
| ** **                                                                   | ** ** | ** **       | ** **           | ** **           | ** ** |
| **Long Term Receivables**                                                    | ** ** | **866,211**      | ** **           | **1,030,688**        | ** ** |
| **Deferred Financing Costs, net**                                            | ** ** | **2,613**        | ** **           | **4,027**            | ** ** |
| **Intangibles, net**                                                         | ** ** | **6,151,686**    | ** **           | **7,136,957**        | ** ** |
| **Goodwill**                                                                 | ** ** | **18,627,363**   | ** **           | **18,513,465**       | ** ** |
| ** **                                                                   | ** ** | ** **       | ** **           | ** **           | ** ** |
| ** **                                                                   | ** ** | **$**            | ** 57,844,825** | ** **           | **$**      | **62,888,199** | ** ** |

 

1

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Table of Contents

 

**Lime Energy Co.**

**Condensed Consolidated BalanceSheets**

* *
| ** **                                                                                                                                                                                                                                                                    | ** ** | **June 30** | ** **           | ** **           | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|----------------------|----------------------|------------|
| ** **                                                                                                                                                                                                                                                                    | ** ** | **2009**         | ** **           | **December 31** | ** ** |
| ** **                                                                                                                                                                                                                                                                    | ** ** | **(unaudited)**  | ** **           | **2008****(1)**      | ** ** |
| ** **                                                                                                                                                                                                                                                                    | ** ** | ** **       | ** **           | ** **           | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                 |       |             |                 |                 |       |
|                                                                                                                                                                                                                                                                          |       |             |                 |                 |       |
| **Current liabilities**                                                                                                                                                                                                                                                       |       |             |                 |                 |       |
| Lines  of Credit                                                                                                                                                                                                                                                              | ** ** | **$**            | **2,115,775**        | ** **           | **$**      | **3,986,708** | ** ** |
| Current  portion of long-term debt                                                                                                                                                                                                                                            | ** ** | **5,001,619**    | ** **           | **187,170**          | ** ** |
| Accounts  payable                                                                                                                                                                                                                                                             | ** ** | **9,829,807**    | ** **           | **15,452,248**       | ** ** |
| Accrued  expenses                                                                                                                                                                                                                                                             | ** ** | **3,299,378**    | ** **           | **3,855,213**        | ** ** |
| Billings  in excess of costs and estimated earnings on uncompleted contracts                                                                                                                                                                                                  | ** ** | **2,813,696**    | ** **           | **1,957,927**        | ** ** |
| Deferred  revenue                                                                                                                                                                                                                                                             | ** ** | **—**       | ** **           | **357,516**          | ** ** |
| Customer  deposits                                                                                                                                                                                                                                                            | ** ** | **794,115**      | ** **           | **1,289,224**        | ** ** |
| **Total Current Liabilities**                                                                                                                                                                                                                                                 | ** ** | **23,854,390**   | ** **           | **27,086,006**       | ** ** |
|                                                                                                                                                                                                                                                                          |       |             |                 |                 |       |
| **Deferred Revenue**                                                                                                                                                                                                                                                          | ** ** | **6,468**        | ** **           | **90,773**           | ** ** |
| **Long-Term Debt,** less current portion                                                                                                                                                                                                                                      | ** ** | **1,173,887**    | ** **           | **5,716,848**        | ** ** |
| **Deferred Tax Liability**                                                                                                                                                                                                                                                    | ** ** | **1,034,000**    | ** **           | **1,034,000**        | ** ** |
|                                                                                                                                                                                                                                                                          |       |             |                 |                 |       |
| **Total Liabilities**                                                                                                                                                                                                                                                         | ** ** | **26,068,745**   | ** **           | **33,927,627**       | ** ** |
|                                                                                                                                                                                                                                                                          |       |             |                 |                 |       |
| **Stockholders’ Equity**                                                                                                                                                                                                                                                 |       |             |                 |                 |       |
| Preferred  stock, $0.01 par value; 1,000,000 authorized, 366,943 and 358,710 issued as  of June 30, 2009 and December 31, 2008, respectively (liquidation  value of $15,044,625 and $14,707,110 as of June 30, 2009 and December 31,  2008, respectively) | ** ** | **3,669**        | ** **           | **3,587**            | ** ** |
| Common  stock, $0.0001 par value; 200,000,000 shares authorized 13,075,997 and  9,555,053 issued as of June 30, 2009 and December 31, 2008,  respectively                                                                                                           | ** ** | **1,307**        | ** **           | **955**              | ** ** |
| Additional  paid-in capital                                                                                                                                                                                                                                                   | ** ** | **144,867,555**  | ** **           | **134,390,419**      | ** ** |
| Accumulated  deficit                                                                                                                                                                                                                                                          | ** ** | **(113,096,451** | **)**                | **(105,434,389**     | **)**      |
|                                                                                                                                                                                                                                                                          |       |             |                 |                 |       |
| **Total Stockholders’ Equity**                                                                                                                                                                                                                                           | ** ** | **31,776,080**   | ** **           | **28,960,572**       | ** ** |
|                                                                                                                                                                                                                                                                          |       |             |                 |                 |       |
| ** **                                                                                                                                                                                                                                                                    | ** ** | **$**            | ** 57,844,825** | ** **           | **$**      | **62,888,199** | ** ** |

 

*See accompanying notes to condensed consolidatedfinancial statements*

 

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| *(1)* | *Derived from audited financial statements in the Company’s  annual report on Form 10-K for the year ended December 31, 2008* |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------|

 

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**Lime Energy Co.**

**Condensed Consolidated Statementsof Operations**

**(Unaudited)**

* *
| **Three  Months Ended June 30,**                               | ** ** | **2009**       | ** **     | **2008**       | ** ** |
|---------------------------------------------------------------------|------------|----------------|----------------|----------------|------------|
|                                                                |       |           |           |           |       |
| **Revenue**                                                         | ** ** | **$**          | **15,795,187** | ** **     | **$**      | **6,377,908** | ** ** |
|                                                                |       |           |           |           |       |
| Cost  of sales                                                      | ** ** | **12,952,804** | ** **     | **5,474,757**  | ** ** |
|                                                                |       |           |           |           |       |
| **Gross Profit**                                                    | ** ** | **2,842,383**  | ** **     | **903,151**    | ** ** |
|                                                                |       |           |           |           |       |
| Selling,  general and administrative                                | ** ** | **5,549,345**  | ** **     | **3,831,502**  | ** ** |
| Amortization  of intangibles                                        | ** ** | **313,288**    | ** **     | **274,816**    | ** ** |
|                                                                |       |           |           |           |       |
| **Operating Loss**                                                  | ** ** | **(3,020,250** | **)**          | **(3,203,167** | **)**      |
|                                                                |       |           |           |           |       |
| Other  Income (Expense)                                             |       |           |           |           |       |
| Interest  income                                                    | ** ** | **30,258**     | ** **     | **13,224**     | ** ** |
| Interest  expense                                                   | ** ** | **(426,874**   | **)**          | **(534,384**   | **)**      |
|                                                                |       |           |           |           |       |
| Total  other income (expense)                                       | ** ** | **(396,616**   | **)**          | **(521,160**   | **)**      |
|                                                                |       |           |           |           |       |
| Loss  from continuing operations before discontinued operations     | ** ** | **(3,416,866** | **)**          | **(3,724,327** | **)**      |
|                                                                |       |           |           |           |       |
| **Discontinued Operations:**                                        |       |           |           |           |       |
| Loss  from operation of discontinued business                       | ** ** | **(636,895**   | **)**          | **(806,262**   | **)**      |
|                                                                |       |           |           |           |       |
| **Net Loss**                                                        | ** ** | **(4,053,761** | **)**          | **(4,530,589** | **)**      |
|                                                                |       |           |           |           |       |
| Preferred  Stock Dividends                                          | ** ** | **(646,396**   | **)**          | **—**     | ** ** |
|                                                                |       |           |           |           |       |
| **Net Loss Available to Common Stockholders**                       | ** ** | **$**          | **(4,700,157** | **)**          | **$**      | **(4,530,589** | **)** |
|                                                                |       |           |           |           |       |
| Basic  and diluted loss per common share from Continuing operations | ** ** | **$**          | **(0.31**      | **)**          | **$**      | **(0.47** | **)** |
|                                                                |       |           |           |           |       |
| Discontinued  operations                                            | ** ** | **(0.05**      | **)**          | **(0.10**      | **)**      |
|                                                                |       |           |           |           |       |
| Basic  and Diluted Loss Per Common Share                            | ** ** | **$**          | **(0.36**      | **)**          | **$**      | **(0.57** | **)** |
|                                                                |       |           |           |           |       |
| Weighted  Average Common Shares Outstanding                         | ** ** | **13,069,520** | ** **     | **7,952,910**  | ** ** |

 

*See accompanying notes to condensed consolidatedfinancial statements*

 

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**Lime Energy Co.**

**Condensed Consolidated Statementsof Operations**

**(Unaudited)**

** **
| **Six  Months Ended June 30,**                                 | ** ** | **2009**       | ** **     | **2008**       | ** ** |
|---------------------------------------------------------------------|------------|----------------|----------------|----------------|------------|
|                                                                |       |           |           |           |       |
| **Revenue**                                                         | ** ** | **$**          | **29,519,945** | ** **     | **$**      | **8,624,744** | ** ** |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| Cost  of sales                                                      | ** ** | **23,872,726** | ** **     | **7,688,012**  | ** ** |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| **Gross Profit**                                                    | ** ** | **5,647,219**  | ** **     | **936,732**    | ** ** |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| Selling,  general and administrative                                | ** ** | **10,781,982** | ** **     | **6,821,421**  | ** ** |
| Amortization  of intangibles                                        | ** ** | **658,201**    | ** **     | **381,666**    | ** ** |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| **Operating Loss**                                                  | ** ** | **(5,792,964** | **)**          | **(6,266,355** | **)**      |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| Other  Income (Expense)                                             | ** ** | ** **     | ** **     | ** **     | ** ** |
| Interest  income                                                    | ** ** | **62,940**     | ** **     | **57,125**     | ** ** |
| Interest  expense                                                   | ** ** | **(902,815**   | **)**          | **(918,102**   | **)**      |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| Total  other income (expense)                                       | ** ** | **(839,875**   | **)**          | **(860,977**   | **)**      |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| Loss  from continuing operations before discontinued operations     | ** ** | **(6,632,839** | **)**          | **(7,127,332** | **)**      |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| **Discontinued Operations:**                                        | ** ** | ** **     | ** **     | ** **     | ** ** |
| Loss  from operation of discontinued business                       | ** ** | **(1,029,223** | **)**          | **(1,636,630** | **)**      |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| **Net Loss**                                                        | ** ** | **(7,662,062** | **)**          | **(8,763,962** | **)**      |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| Preferred  Stock Dividends                                          | ** ** | **(1,202,185** | **)**          | **—**     | ** ** |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| **Net Loss Available to Common Stockholders**                       | ** ** | **$**          | **(8,864,247** | **)**          | **$**      | **(8,763,962** | **)** |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| Basic  and diluted loss per common share from Continuing operations | ** ** | **$**          | **(0.65**      | **)**          | **$**      | **(0.91** | **)** |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| Discontinued  operations                                            | ** ** | **(0.09**      | **)**          | **(0.21**      | **)**      |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| Basic  and Diluted Loss Per Common Share                            | ** ** | **$**          | **(0.74**      | **)**          | **$**      | **(1.12** | **)** |
| ** **                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| Weighted  Average Common Shares Outstanding                         | ** ** | **12,054,940** | ** **     | **7,842,436**  | ** ** |

 

*See accompanying notes to condensed consolidatedfinancial statements*

 

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**Lime Energy Co.**

**Condensed ConsolidatedStatement of Stockholders’ Equity**

**(Unaudited)**

 
| ** **                                                                          | ** ** | ** **     | ** ** | ** ** | ** ** | **Series A-1** | ** **  | **Series A-1** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Total**              | ** **       |
|-------------------------------------------------------------------------------------|------------|----------------|------------|------------|------------|---------------------|-------------|---------------------|------------|----------------|------------|-----------------|------------|------------------------|------------------|
| ** **                                                                          | ** ** | **Common**     | ** ** | **Common** | ** ** | **Preferred**       | ** **  | **Preferred**       | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** **       |
| ** **                                                                          | ** ** | **Shares**     | ** ** | **Stock**  | ** ** | **Shares**          | ** **  | **Stock**           | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Equity  (Deficit)**  | ** **       |
|                                                                                |       |           |       |       |       |                |        |                |       |           |       |            |       |                   |             |
| **Balance,** December 31, 2008                                                 | ** ** | **9,555,053**  | ** ** | **$**      | **955**    | ** **          | **358,710** | ** **          | **$**      | **3,587**      | ** ** | **134,390,419** | ** ** | **$**                  | **(105,434,389** | **)** | **$** | **28,960,572** | ** ** |
|                                                                                |       |           |       |       |       |                |        |                |       |           |       |            |       |                   |             |
| Issuance  of common stock (less issuance costs of $24,954)                          |       | 933,049        |       | 93         |       | —              |        | —              |       | 3,249,953      |       | —          |       | 3,250,046              |             |
|                                                                                |       |           |       |       |       |                |        |                |       |           |       |            |       |                   |             |
| Acquisition  of Advanced Biotherapy, Inc. (less transaction costs of $770,926) |       | 2,486,149      |       | 249        |       | —              |        | —              |       | 6,737,661      |       | —          |       | 6,737,910              |             |
|                                                                                |       |           |       |       |       |                |        |                |       |           |       |            |       |                   |             |
| Earn-out  shares paid to former owners of Applied Energy Management, Inc.      |       | 63,052         |       | 6          |       | —              |        | —              |       | 293,186        |       | —          |       | 293,192                |             |
|                                                                                |       |           |       |       |       |                |        |                |       |           |       |            |       |                   |             |
| Preferred  dividends                                                                |       | —         |       | —     |       | —              |        | —              |       | (1,202,185     | )          | —          |       | (1,202,185             | )                |
|                                                                                |       |           |       |       |       |                |        |                |       |           |       |            |       |                   |             |
| Satisfaction  of accrued dividends through the issuance of preferred stock          |       | —         |       | —     |       | 8,233               |        | 82                  |       | 337,439        |       | —          |       | 337,521                |             |
|                                                                                |       |           |       |       |       |                |        |                |       |           |       |            |       |                   |             |
| Satisfaction  of interest obligation through issuance of common stock               |       | 29,735         |       | 3          |       | —              |        | —              |       | 124,477        |       | —          |       | 124,480                |             |
|                                                                                |       |           |       |       |       |                |        |                |       |           |       |            |       |                   |             |
| Share  based compensation                                                           |       | —         |       | —     |       | —              |        | —              |       | 909,550        |       | —          |       | 909,550                |             |
|                                                                                |       |           |       |       |       |                |        |                |       |           |       |            |       |                   |             |
| Shares  issued for benefit plans and option exercises                               |       | 8,959          |       | 1          |       | —              |        | —              |       | 27,055         |       | —          |       | 27,056                 |             |
|                                                                                |       |           |       |       |       |                |        |                |       |           |       |            |       |                   |             |
| Net  loss for the six months ended June 30, 2009                               |       | —         |       | —     |       | —              |        | —              |       | —         |       | (7,662,062      | )          | (7,662,062             | )                |
|                                                                                |       |           |       |       |       |                |        |                |       |           |       |            |       |                   |             |
| **Balance,** June 30, 2009                                                     | ** ** | **13,075,997** | ** ** | **$**      | **1,307**  | ** **          | **366,943** | ** **          | **$**      | **3,669**      | ** ** | **144,867,555** | ** ** | **$**                  | **(113,096,451** | **)** | **$** | **31,776,080** | ** ** |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

5

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**Lime Energy Co.**

**Condensed ConsolidatedStatements of Cash Flows**

**(Unaudited)**

 
| **Six  Months Ended June 30,**                                                                  | ** ** | **2009**       | ** **     | **2008**       | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------|----------------|----------------|------------|
|                                                                                                 |       |           |           |           |       |
| **Cash Flows from Operating Activities**                                                             |       |           |           |           |       |
| Net  Loss                                                                                            | ** ** | **$**          | **(7,662,062** | **)**          | **$**      | **(8,763,962** | **)** |
| ** **                                                                                           | ** ** | ** **     | ** **     | ** **     | ** ** |
| Adjustments  to reconcile net loss to net cash used in operating activities, net of assets  acquired | ** ** | ** **     | ** **     | ** **     | ** ** |
| Provision  for (recovery of) bad debt                                                                | ** ** | **79,665**     | ** **     | **(16,995**    | **)**      |
| Share  based compensation                                                                            | ** ** | **909,550**    | ** **     | **1,944,920**  | ** ** |
| Preferred  stock dividends                                                                           | ** ** | **(1,202,185** | **)**          | **—**     | ** ** |
| Depreciation  and amortization                                                                       | ** ** | **1,095,008**  | ** **     | **815,473**    | ** ** |
| Amortization  of deferred financing costs                                                            | ** ** | **1,414**      | ** **     | **1,421**      | ** ** |
| Amortization  of issuance discount                                                                   | ** ** | **495,042**    | ** **     | **497,777**    | ** ** |
| Issuance  of warrants in exchange for services received                                              | ** ** | **—**     | ** **     | **97,000**     | ** ** |
| Accrued  dividend satisfied through the issuance of preferred stock                                  | ** ** | **337,521**    | ** **     | **—**     | ** ** |
| Accrued  interest satisfied through the issuance of common stock                                     | ** ** | **124,480**    | ** **     | **125,167**    | ** ** |
| PIK  notes issued for interest                                                                       | ** ** | **21,095**     | ** **     | **—**     | ** ** |
| Asset  impairment                                                                                    | ** ** | **503,407**    | ** **     | ** **     | ** ** |
| Gain  on disposition of fixed assets                                                                 | ** ** | **(351**       | **)**          | **—**     | ** ** |
| Changes  in assets and liabilities                                                                   | ** ** | ** **     | ** **     | ** **     | ** ** |
| Accounts  receivable                                                                                 | ** ** | **4,534,064**  | ** **     | **391,528**    | ** ** |
| Inventories                                                                                          | ** ** | **(137,330**   | **)**          | **210,647**    | ** ** |
| Costs  and estimated earnings in excess of billings on uncompleted contracts                         | ** ** | **(764,064**   | **)**          | **(317,958**   | **)**      |
| Prepaid  expenses and other current assets                                                           | ** ** | **560,451**    | ** **     | **(349,637**   | **)**      |
| Accounts  payable                                                                                    | ** ** | **(5,638,802** | **)**          | **(1,436,762** | **)**      |
| Accrued  expenses                                                                                    | ** ** | **310,967**    | ** **     | **367,867**    | ** ** |
| Billings  in excess of costs and estimated earnings on uncompleted contracts                         | ** ** | **855,769**    | ** **     | **(100,200**   | **)**      |
| Deferred  revenue                                                                                    | ** ** | **(89,674**    | **)**          | **(441,693**   | **)**      |
| Customer  deposits                                                                                   | ** ** | **(423,524**   | **)**          | **(96,223**    | **)**      |
| ** **                                                                                           | ** ** | ** **     | ** **     | ** **     | ** ** |
| Net  cash used in operating activities                                                               | ** ** | **(6,089,559** | **)**          | **(7,071,630** | **)**      |
| ** **                                                                                           | ** ** | ** **     | ** **     | ** **     | ** ** |
| **Cash Flows Used in Investing Activities**                                                          | ** ** | ** **     | ** **     | ** **     | ** ** |
| Acquisition  costs                                                                                   | ** ** | **(613,898**   | **)**          | **(3,716,752** | **)**      |
| Proceeds  from sale of fixed assets                                                                  | ** ** | **11,172**     | ** **     | **—**     | ** ** |
| Purchase  of property and equipment                                                                  | ** ** | **(201,962**   | **)**          | **(135,912**   | **)**      |
| ** **                                                                                           | ** ** | ** **     | ** **     | ** **     | ** ** |
| Net  cash used in investing activities                                                               | ** ** | **(804,688**   | **)**          | **(3,852,664** | **)**      |
| ** **                                                                                           | ** ** | ** **     | ** **     | ** **     | ** ** |
| **Cash Flows Provided by Financing Activities**                                                      | ** ** | ** **     | ** **     | ** **     | ** ** |
| Net  advances (payments) on line of credit                                                           | ** ** | **(1,850,000** | **)**          | **7,009,797**  | ** ** |
| Proceeds  from long-term debt                                                                        | ** ** | **—**     | ** **     | **25,372**     | ** ** |
| Payments  of long-term debt                                                                          | ** ** | **(223,555**   | **)**          | **(521,025**   | **)**      |
| Proceeds  from issuance of common stock                                                              | ** ** | **10,703,181** | ** **     | **—**     | ** ** |
| Costs  related to stock issuances                                                                    | ** ** | **(795,879**   | **)**          | **—**     | ** ** |
| Proceeds  from exercise of options and warrants                                                      | ** ** | **—**     | ** **     | **103,821**    | ** ** |
| ** **                                                                                           | ** ** | ** **     | ** **     | ** **     | ** ** |
| Net  cash provided by financing activities                                                           | ** ** | **7,833,747**  | ** **     | **6,617,965**  | ** ** |
| ** **                                                                                           | ** ** | ** **     | ** **     | ** **     | ** ** |
| **Net Increase (Decrease) in Cash and Cash Equivalents**                                             | ** ** | **939,500**    | ** **     | **(4,306,329** | **)**      |
| ** **                                                                                           | ** ** | ** **     | ** **     | ** **     | ** ** |
| Cash  and Cash Equivalents, at beginning of period                                                   | ** ** | **3,733,540**  | ** **     | **4,780,701**  | ** ** |
| ** **                                                                                           | ** ** | ** **     | ** **     | ** **     | ** ** |
| Cash  and Cash Equivalents, at end of period                                                         | ** ** | **$**          | **4,673,040**  | ** **     | **$**      | **474,372** | ** ** |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

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| **As of  June 30,**                                                                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                       |       |     |       |     |       |
| **Supplemental Disclosure of Cash Flow Information**                                                       |       |     |       |     |       |
|                                                                                                       |       |     |       |     |       |
| Cash  paid during the period for interest - continuing operations                                          |       | $        | 281,873    |     | $          | 193,038 |   |
|                                                                                                       |       |     |       |     |       |
| Cash  paid during the period for interest - discontinued operations                                        |       | 1,073    |       | 3,378    |       |
|                                                                                                       |       |     |       |     |       |
| Cash  paid for preferred dividends                                                                         |       | 506,279  |       | —   |       |
|                                                                                                       |       |     |       |     |       |
| Interest  obligation satisfied through the issuance of common stock                                        |       | 124,480  |       | 125,167  |       |
|                                                                                                       |       |     |       |     |       |
| Accrued  earn-out satisfied through the issuance of common stock                                           |       | 293,192  |       | —   |       |
|                                                                                                       |       |     |       |     |       |
| Satisfaction  of accrued dividend through the issuance of 8,233 shares of Series A-1 preferred  stock |       | 337,521  |       | —   |       |
|                                                                                                       |       |     |       |     |       |
| Extinguishment  of line of credit                                                                          |       | 20,933   |       | —   |       |
|                                                                                                       |       |     |       |     |       |
| Issuance  of revolving credit note in satisfaction of interest payable                                     |       | 21,095   |       | —   |       |
|                                                                                                            |            |          |            |          |            |  |  |

 

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Lime Energy Co.

Notes to CondensedConsolidated Financial Statements

 

***Note 1 — Basis of Presentation***

 

The accompanyingunaudited condensed consolidated financial statements (the “FinancialStatements”) of Lime Energy Co. (“Lime Energy” and, together with itssubsidiaries, the “Company”, “we”, “us” or “our”) have been prepared inaccordance with Rule 10-01 of Regulation S-X promulgated by the Securitiesand Exchange Commission (the “SEC”) and, therefore, do not include allinformation and footnotes necessary for a fair presentation of financialposition, results of operations and cash flows in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”).  In our opinion, however, the FinancialStatements contain all adjustments, consisting only of normal recurringadjustments, necessary to present fairly our financial position, results ofoperations and cash flows as of and for the interim periods.

 

The results of operationsfor the six months ended June 30, 2009 and 2008 are not necessarilyindicative of the results to be expected for the full year.

 

For further information,refer to the audited financial statements and the related footnotes included inthe Lime Energy Co. Annual Report on Form 10-K for the year ended December 31,2008.

 

The Company has takensteps to dispose of its Maximum Performance Group, Inc. (“MPG”) subsidiaryand has reported the operating results for this business as discontinuedoperations on the expectation that it will sell MPG within the nearfuture.  Please see Note 5 for additionalinformation regarding the discontinued operations.

 

The Company has evaluatedsubsequent events through August 12, 2009, the date these financialstatements were issued.

 

***Note 2 - Stock-Based Compensation***

 

**StockOptions**

 

TheCompany accounts for employee stock options in accordance with Statement ofFinancial Accounting Standards No. 123(R). This pronouncement requirescompanies to measure the cost of employee service received in exchange for ashare based award (typically stock options) based on the fair value of theaward, with expense recognized over the requisite service period, which isgenerally equal to the vesting period of the option.  The Company recognized $393,237 and $989,672of share based compensation expense related to stock options during thethree-month periods ended June 30, 2009 and 2008, respectively.  The following table summarizes the expensefor the three-month periods ended June 30, 2009 and 2008:

 
| ** **               | ** ** | **Three months ended June 30, 2009** | ** ** | **Three months ended June 30, 2008** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **Cost of**                               | ** ** | ** **                                | ** ** | ** ** | ** ** | **Cost of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Sales**                                 | ** ** | **SG&A**                              | ** ** | **Total** | ** ** | **Sales** | ** ** | **SG&A** | ** ** | **Total** | ** ** |
|                     |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Continuing  operations   |       | $                                         | 23,387     |                                      | $          | 366,078 |   | $ | 389,465 |   | $ | 44,927 |   | $ | 894,205 |   | $ | 939,132 |   |
|                     |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Discontinued  operations |       | 2,746                                     |       | 1,026                                     |       | 3,772 |   | 15,994 |   | 34,546 |   | 50,540 |   |
|                     |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
|                     |       | $                                         | 26,133     |                                      | $          | 367,104 |   | $ | 393,237 |   | $ | 60,921 |   | $ | 928,751 |   | $ | 989,672 |   |

 

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Lime Energy Co.

Notes to CondensedConsolidated Financial Statements

 

TheCompany recognized $867,752 and $1,944,920 of share based compensation expenserelated to stock options during the six-month periods ended June 30, 2009and 2008, respectively.  The followingtable summarizes the expense for the six-month periods ended June 30, 2009and 2008:

 
| ** **               | ** ** | **Six months ended June 30, 2009** | ** ** | **Six months ended June 30, 2008** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | **Cost of**                             | ** ** | ** **                              | ** ** | ** ** | ** ** | **Cost of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Sales**                               | ** ** | **SG&A**                            | ** ** | **Total** | ** ** | **Sales** | ** ** | **SG&A** | ** ** | **Total** | ** ** |
|                     |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Continuing  operations   |       | $                                       | 53,465     |                                    | $          | 805,875 |   | $ | 859,340 |   | $ | 87,180 |   | $ | 1,749,558 |   | $ | 1,836,738 |   |
|                     |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Discontinued  operations |       | 6,372                                   |       | 2,040                                   |       | 8,412 |   | 27,874 |   | 80,308 |   | 108,182 |   |
|                     |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
|                     |       | $                                       | 59,837     |                                    | $          | 807,915 |   | $ | 867,752 |   | $ | 115,054 |   | $ | 1,829,866 |   | $ | 1,944,920 |   |

 

TheCompany historically used a modified Black-Scholes option pricing model tovalue its employee options, but beginning October 1, 2008, it began usingan Enhanced Hull-White Trinomial model. The weighted-average, grant-date fair value of stock options granted toemployees and the weighted-average significant assumptions used to determinethose fair values, using a modified Black-Scholes option pricing model andEnhanced Hull-White Trinomial model for stock options under Statement of FinancialAccounting Standards No. 123R, are as follows:

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **June 30**       | ** ** | **June 30**     | ** ** |
| ** **                                      | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                            |       |                   |       |                 |       |   |   |   |   |
| Weighted  average fair-value per option granted |       | $                      | 1.45       |                 | $          | 4.38 |   | $ | 1.94 |   | $ | 5.09 |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| Significant  assumptions (weighted average):    |       |                   |       |                 |       |   |   |   |   |
| Risk-free  rate                                 |       | 0.21                   | %          | 1.85                 | %          | 0.09 | % | 2.25 | % |
| Dividend  yield                                 |       | 0.00                   | %          | 0.00                 | %          | 0.00 | % | 0.00 | % |
| Expected  volatility                            |       | 82.1                   | %          | 86.6                 | %          | 83.8 | % | 87.4 | % |
| Expected  life (years) (1)                      |       | 5.9                    |       | 5.7                  |       | 5.5 |   | 5.6 |   |
| Expected  turn-over rate (2)                    |       | 17.00                  | %          | —               |       | 12.31 | % | — |   |
| Expected  exercise multiple (2)                 |       | 2.20                   |       | —               |       | 2.20 |   | — |   |
|                                                 |            |                        |            |                      |            |  |  |  |  |  |  |  |  |

 

----

(1) Thecompany continues to use the simplified method to estimate expected term due tothe historical structural changes to its business such that historical exercisedata may no longer provide a reasonable basis on which to estimate expectedterm.

(2) Theseassumptions are used with the Enhanced Hull-White Trinomial model which theCompany began using on October 1, 2008.

 

Therisk-free interest rate is based on the U.S. Treasury Bill rates at the time ofgrant. The dividend yield reflects the fact that the Company has never paid adividend on its common stock and does not expect to in the foreseeable future.The Company estimated the volatility of its common stock at the date of grantbased on the historical volatility of its stock. The expected term of theoptions is based on the simplified method as described in the Staff AccountingBulletin No. 107, which is the average of the vesting term and the originalcontract term.  The expected turn-overrate represents the expected forfeitures due to 

 

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Lime Energy Co.

Notes to CondensedConsolidated Financial Statements

 

employeeturnover and is based on our historical rates. The expected exercise multiple represents the mean ratio of the stockprice to the exercise price at which employees are expected to exercise theiroptions and is based on an empirical study completed by S. Huddart and M. Lang(1996).

 

OnMarch 3, 2009, the Company completed a value-for-value stock optionexchange program which was approved by the Company’s stockholders on November 26,2008. Pursuant to the option exchange, 238,697 eligible options were canceledand replaced with 109,073 replacement stock options. The exchange ratio wascalculated such that the value of the replacement options would approximate thevalue of the canceled options, determined in accordance with the Black-Scholesoption valuation model.

 

Aspart of the acquisition of Advanced Biotherapy, Inc. (“ADVB”) the Companyagreed to exchange existing ADVB options for options to purchase the number ofshares of its stock each holder would have received had he or she exercised theoption in full prior to the acquisition, with the same aggregate price andexpiration date.  ADVB option holders haduntil May 5, 2009 to accept the Company’s exchange offer.  The final results of the exchange offerresulted in the Company issuing options to acquire 194,150 shares of its stockto former holders of ADVB options with an average exercise price of $3.62 pershare.  The Company does not expect toissue any additional options to former holders of ADVB options.

 

Optionactivity under the Company’s stock option plans as of June 30, 2009 andchanges during the three months then ended are presented below:

 
| ** **                                 | ** ** | **Shares** | ** ** | **Exercise Price Per  Share** | ** ** | **Weighted  Average Exercise  Price** | ** ** |
|--------------------------------------------|------------|------------|------------|-------------------------------|------------|---------------------------------------|------------|
|                                       |       |       |       |                          |       |                                  |       |
| Outstanding  at March 31, 2009        |       | 2,563,094  |       | $3.30 -  $1,363.95            |       | $                                     | 16.75      |   |
|                                       |       |       |       |                          |       |                                  |       |
| Granted                                    |       | 40,259     |       | $3.30 - $3.75                 |       | $                                     | 3.61       |   |
| Exercised                                  |       | —     |       | —                        |       | —                                |       |
| Forfeited                                  |       | (63,525    | )          | $3.50 - $13.30                |       | $                                     | 7.21       |   |
|                                       |       |       |       |                          |       |                                  |       |
| Outstanding  at June 30, 2009         |       | 2,539,828  |       | $3.30 -  $1,363.95            |       | $                                     | 16.78      |   |
|                                       |       |       |       |                          |       |                                  |       |
| Options  exercisable at June 30, 2009 |       | 1,792,873  |       | $3.30 -  $1,363.95            |       | $                                     | 21.10      |   |

 

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Lime Energy Co.

Notes to CondensedConsolidated Financial Statements

 

Optionactivity under the Company’s stock option plans as of June 30, 2009 andchanges during the six months then ended are presented below:

 
| ** **                                 | ** ** | **Shares** | ** ** | **Exercise Price Per  Share** | ** ** | **Weighted  Average Exercise  Price** | ** ** |
|--------------------------------------------|------------|------------|------------|-------------------------------|------------|---------------------------------------|------------|
|                                       |       |       |       |                          |       |                                  |       |
| Outstanding  at December 31, 2008     |       | 2,488,657  |       | $3.50 -  $1,363.95            |       | $                                     | 18.61      |   |
|                                       |       |       |       |                          |       |                                  |       |
| Granted                                    |       | 262,865    |       | $3.30 - $196.88               |       | $                                     | 3.82       |   |
| Exercised                                  |       | —     |       | —                        |       | —                                |       |
| Forfeited                                  |       | (82,070    | )          | $3.50 - $13.30                |       | $                                     | 7.56       |   |
| Tendered  for exchange                     |       | (238,697   | )          | $8.26 - $215.25               |       | $                                     | 18.76      |   |
| Replacements  issued                       |       | 109,073    |       | $3.66                         |       | $                                     | 3.66       |   |
|                                       |       |       |       |                          |       |                                  |       |
| Outstanding  at June 30, 2009         |       | 2,539,828  |       | $3.30 -  $1,363.95            |       | $                                     | 16.78      |   |
|                                       |       |       |       |                          |       |                                  |       |
| Options  exercisable at June 30, 2009 |       | 1,792,873  |       | $3.30 -  $1,363.95            |       | $                                     | 21.10      |   |

 

Thefollowing table summarizes information about stock options outstanding at June 30,2009:

 

| ** **          | ** ** | **Options Outstanding**                         | ** ** | **Options Exercisable**                             | ** ** |
|---------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Exercise Price**  | ** ** | **Number  Outstanding  at June 30,  2009** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable at  June 30, 2009** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|                |       |                                            |       |                                                |       |   |   |   |   |   |   |
| $3.30  - $4.00      |       | 667,928                                         |       | 8.2 years                                           |       | $ | 3.48 |   | 243,724 |   | $ | 3.37 |   |
| $4.01  - $6.00      |       | 35,715                                          |       | 9.5 years                                           |       | $ | 4.65 |   | 17,860 |   | $ | 4.65 |   |
| $6.01  - $8.00      |       | 1,406,100                                       |       | 6.9 years                                           |       | $ | 7.07 |   | 1,349,434 |   | $ | 7.04 |   |
| $8.01  - $10.00     |       | 22,369                                          |       | 8.7 years                                           |       | $ | 9.07 |   | 14,604 |   | $ | 9.15 |   |
| $10.01  - $20.00    |       | 365,937                                         |       | 8.3 years                                           |       | $ | 11.15 |   | 125,472 |   | $ | 11.15 |   |
| $20.01  - $1,363.95 |       | 41,779                                          |       | 1.2 years                                           |       | $ | 619.80 |   | 41,779 |   | $ | 619.80 |   |
|                |       |                                            |       |                                                |       |   |   |   |   |   |   |
| $3.30  - $1,363.95  |       | 2,539,828                                       |       | 7.4 years                                           |       | $ | 16.78 |   | 1,792,873 |   | $ | 21.10 |   |

 

Theaggregate intrinsic value of the outstanding options (the difference betweenthe closing stock price on the last trading day of the second quarter of 2009of $4.80 per share and the exercise price, multiplied by the number ofin-the-money options) that would have been received by the option holders hadall option holders exercised their options on June 30, 2009 was $888,583.The aggregate intrinsic value of exercisable options as of June 30, 2009was $350,252.  These amounts will changebased on changes in the fair market value of the Company’s common stock.

 

Asof June 30, 2009, $1,404,876 of total unrecognized compensation costrelated to stock options is expected to be recognized over a weighted-averageperiod of one year.

 

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Lime Energy Co.

Notes to CondensedConsolidated Financial Statements

 

*Employee Stock Purchase Plan*

 

The Company implemented an Employee Stock PurchasePlan during the first quarter of 2009, with the first offering periodcommencing on March 1, 2009 and ending on May 31, 2009.  A total of 8,959 shares of the Company’scommon stock were purchased under the Employee Stock Purchase Plan during thesix months ended June 30, 2009. As of June 30, 2009, 291,041 sharesremain available for issuance under the 2008 Purchase Plan. The Companyrecorded compensation expense related to the Employee Stock Purchase Plan of$29,097 and $41,798 for the three month and six month periods ended June 30,2009, respectively.  As of June 30,2009 there was approximately $65,275 of total unrecognized compensation costrelated to the Employee Stock Purchase Plan which is expected to be recognizedover a 17 month period.

 

***Note 3 — Acquisition of Advanced Biotherapy, Inc.***

 

OnMarch 3, 2009, the Company exchanged 2,252,341 shares of its common stockfor 1,060,421,884 shares of Advanced Biotherapy, Inc. (“ADVB”) held bycertain stockholders of ADVB (the “Sellers”) representing approximately 90.8%of ADVB’s issued and outstanding shares pursuant to a Stock Purchase Agreementdated November 18, 2008.  TheCompany then completed a short-form merger in which it merged ADVB with andinto a newly formed merger subsidiary, with the merger subsidiary continuing asthe surviving entity.  Upon the closingof the merger the Company obtained access to ADVB’s assets, includingapproximately $7.4 million of cash and a Revolving Credit Note issued by theCompany that had an outstanding balance of $42,029 and accrued interest payableof $51,797.  The Company has cancelledthe Revolving Credit Note and does not plan to continue to operate ADVB as agoing concern.

 

TheCompany exchanged the remaining shares of ADVB for 233,808 shares of theCompany’s common stock, pursuant to a Form S-4 registration statement(reg. no. 333-156924) that was declared effective by the Securities andExchange Commission on February 6, 2009.

 

RichardP. Kiphart, one of the Sellers, was the beneficial owner of more than 80% ofthe shares of ADVB and served as its Chairman. Mr. Kiphart also served andcontinues to serve as Chairman of the Company, and, after the closing of thepurchase and the merger, is the beneficial owner of approximately 40% of thecommon shares of the Company.  DavidValentine is also a shareholder and director of Lime and was a stockholder anddirector of ADVB.

 

ADVB was formed for thepurpose of developing biologic therapeutic antibodies for the treatment of arange of autoimmune diseases based on an anti-cytokine platform technology.ADVB’s activities consisted primarily of research, development andinvestigational human clinical trials. During 2006, ADVB completed a debt restructuring and equity placement atwhich time Mr. Kiphart became ADVB’s chairman and majority owner.  Due to the time and expense required tocommercialize the methods underlying its patents in combination with theremaining life of the patents, ADVB’s management decided to discontinue allresearch and development work in 2006 and instead focus on investment andacquisition opportunities.  As of December 31,2008, it had one part-time employee whom Lime Energy did not retain after thestock exchange.

 

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Lime Energy Co.

Notes to CondensedConsolidated Financial Statements

 

ADVB has no revenuegenerating operations and does not have employees capable of developing aproduct that will be considered a business. Therefore it is not considered abusiness as defined by Regulation S-X, Rule 11-01(d) or by generallyaccepted accounting principles. Consequently, the merger was not accounted foras a business combination under the guidance of Financial Accounting Standard No. 141R,Business Combinations.  The substance ofthe ADVB Acquisition includes two distinct events. First, as a result of thetransaction, the Company has settled the amounts due to ADVB under itsrevolving credit note (see Note 10). In addition, the Company has receivedapproximately $7.4 million of cash in exchange for the shares of common stockit issued in connection with the ADVB acquisition. As a result of the merger,the Company eliminated any debt due to ADVB, recorded the assets acquired(consisting primarily of cash and cash equivalents) at fair value and creditedequity for the value of its common shares issued in connection with the ADVBacquisition.

 

***Note 4 — Acquisition of Applied Energy Management, Inc.***

 

On June 11, 2008 the Company acquired all ofthe outstanding capital stock of Applied Energy Management, Inc. (“AEM”)for $4,000,000 in cash and 945,777 shares of the Company’s common stock, ofwhich $3,500,000 in cash and 882,725 shares were paid at the time of closingand $500,000 and 63,052 shares were paid in March 2009 followingdetermination of the amounts owed under an earn-out provision of the purchaseagreement.  For accounting purposes thecommon stock issued was valued at the fair market value at the time ofissuance.  The acquisition was recordedusing the purchase method of accounting, accordingly, the results of operations for AEM have been included in theconsolidated statement of operations since the date of acquisition.

 

***Note 5 — Discontinued Operations***

 

On March 10, 2009, the Company announced itsintention to divest its Energy Technology segment operated by its subsidiaryManagement Performance Group, Inc. (“MPG”).  On August 10, 2009, the Company enteredinto an Asset Purchase Agreement with Elutions, Inc., a Delawarecorporation (“Elutions”) pursuant to which Lime sold certain assets of MPGincluding the eMAC and uMAC systems, accounts receivable, inventory andcustomer monitoring contracts.  The assetsale is structured as an earnout with certain minimum revenue levels that mustbe achieved by Elutions from the sale of the eMAC and uMAC controllers andsystems before any earnout is payable to Lime. The earnout period is for four years and Lime has an opportunity to earnup to $4 million.  The transaction closedon August 10, 2009.  During thequarter ended June 30, 2009, in anticipation of the sale, Lime reduced thecarrying value of MPG’s assets to their expected fair value, incurring animpairment loss of $503,407.

 

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Lime Energy Co.

Notes to CondensedConsolidated Financial Statements

 

The assets and liabilities of the discontinuedoperations that are included in the Company’s consolidated assets andliabilities are as follows:

 
| **As of**                                 | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
|                                      |       |                       |       |
| Accounts  receivable                      |       | $                          | 413,494    |   |
| Other  current assets                     |       | 773,962                    |       |
| Total  current assets                     |       | 1,187,456                  |       |
|                                      |       |                       |       |
| Net  property, plant & equipment |       | 117,434                    |       |
| Other  assets                             |       | 327,097                    |       |
| Total  assets                             |       | $                          | 1,631,987  |   |
|                                      |       |                       |       |
| Accounts  payable                         |       | $                          | 107,110    |   |
| Other  current liabilities                |       | 611,647                    |       |
| Total  current liabilities                |       | 718,757                    |       |
|                                      |       |                       |       |
| Long  term liabilities                    |       | 103,114                    |       |
| Total  liabilities                        |       | $                          | 821,871    |   |

 

After the impairment chargerecorded during the quarter ended June 30, 2009, the carrying value of thenet assets of the discontinued operations as of June 30, 2009 approximated $0.

 

The revenue and lossrelated to the discontinued operations were as follows:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **June 30**       | ** ** | **June 30**     | ** ** |
| **Six  months ended June 30,** | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                |       |                   |       |                 |       |   |   |   |   |
| Revenue                             |       | $                      | 380,409    |                 | $          | 555,861 |   | $ | 780,302 |   | $ | 1,216,504 |   |
|                                |       |                   |       |                 |       |   |   |   |   |
| Net  Loss                           |       | (636,895               | )          | (806,262             | )          | (1,029,223 | ) | (1,636,630 | ) |
|                                     |            |                        |            |                      |            |  |  |  |  |  |  |  |  |

 

***Note 6 — Recent Accounting Pronouncements***

 

InMay 2009, the Financial Accounting Standards Board (the “FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 165, SubsequentEvents (“SFAS 165”). SFAS 165 establishes general standards of accounting forand disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued. In particular,SFAS 165 sets forth: (a) the period after the balance sheet date duringwhich management of a reporting entity should evaluate events or transactionsthat may occur for potential recognition or disclosure in the financialstatements, (b) the circumstances under which an entity should recognizeevents or transactions occurring after the balance sheet date in its financialstatements, and (c) the disclosures that an entity should make aboutevents or transactions that occurred after the balance sheet date. SFAS 165 iseffective for interim or annual reporting periods ending after June 15,2009. The Company’s adoption of SFAS 165 during the 

 

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Lime Energy Co.

Notes to CondensedConsolidated Financial Statements

 

secondquarter of 2009 did not affect the Company’s consolidated results of operationsor financial condition.

 

InJune 2009, the FASB issued two Financial Accounting Standards relating tosecuritizations and special-purpose entities. SFAS No. 166, “Accounting for Transfers of Financial Assets-anamendment of FASB Statement No. 140” (“SFAS 166”) eliminates the conceptof a qualifying special-purpose entity (“QSPE”) and the exemption for QSPE’sfrom the consolidation guidance prescribed in FASB Interpretation No. 46(R) “Consolidationof Variable Interest Entities (revised December 2003)—an interpretation ofARB No. 51.”  SFAS 166 also modifiesthe derecognition criteria for transfers of financial assets.  SFAS No. 167, “Amendments to FASBInterpretation No. 46(R)” (“SFAS 167”) includes new criteria fordetermining the primary beneficiary of variable interest entities and increasesthe frequency in which reassessments must be made to determine the primarybeneficiary of such variable interest entities.

 

SFASNo. 167 was issued to improve financial reporting by enterprises involvedwith variable interest entities and specifically addresses: (1) theeffects on certain provisions of FIN 46 (revised December 2003),Consolidation of Variable Interest Entities, as a result of the elimination ofthe qualifying special-purpose entity concept in SFAS No. 166, and (2) constituentconcerns about the application of certain key provisions of FIN 46(R),including those in which the accounting and disclosures required therein do notalways provide timely and useful information about an enterprise’s involvementin a variable interest entity.

 

BothSFAS No. 166 and SFAS No. 167 are effective for all annual andinterim reports commencing at the start of the Company’s 2010 fiscal year withearly application prohibited. Management does not expect the adoption of thesestatements to have a material effect on the Company’s consolidated financialposition, results of operations, or cash flows.

 

InJune 2009, the FASB issued SFAS No. 168, The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples — a replacement of FASB Statement No. 162. SFAS No. 168provides for the FASB Accounting Standards Codification (the “Codification”) tobecome the single official source of authoritative, nongovernmental U.S. GAAP.The Codification did not change U.S. GAAP but reorganizes the literature and iseffective for the Company’s interim and annual periods ending after September 15,2009. Management does not expect the adoption of this statement to have amaterial effect on the Company’s consolidated financial position, results ofoperations, or cash flows.

 

InApril 2009, the FASB issued FASB Staff Position (“FSP”) FinancialAccounting Standard (“FAS”) 107-1 and Accounting Principles Board Opinion (“APB”)28-1, Interim Disclosure about Fair Value of Financial Instruments (“FSP FAS107-1 and APB 28-1”). This FSP amends SFAS No. 107, Disclosures about FairValue of Financial Instruments, which requires disclosures about the fair valueof financial instruments for interim reporting periods of publicly-tradedcompanies as well as annual financial statements and amends APB No. 28,Interim Financial Reporting, to require those disclosures in summarizedfinancial information at interim reporting periods. The provisions of FSP FAS107-1 and APB 28-1 are effective for interim and annual reporting periodsending after June 15, 2009. The Company’s adoption of FSP FAS 107-1 andAPB 28-1 during the second quarter of 2009 did not affect the Company’sconsolidated results of operations or financial condition.

 

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Lime Energy Co.

Notes to Condensed Consolidated Financial Statements

 

InApril 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When theVolume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”),which amends SFAS No. 157, Fair Value Measurements (“SFAS 157”) to provideadditional guidance on estimating fair value when the volume and level ofactivity for an asset or liability have significantly decreased. In addition,this FSP includes guidance on identifying circumstances that indicate atransaction is not orderly. The provisions of FSP 157-4 are effective for interimand annual reporting periods ending after June 15, 2009. The Company’sadoption of FSP FAS 157-4 during the second quarter of 2009 did not affect theCompany’s consolidated results of operations or financial condition.

 

***Note 7 — Net Loss Per Share***

 

TheCompany computes loss per share under Statement of Financial AccountingStandards (SFAS) No. 128 “Earnings Per Share,” which requires presentationof two amounts: basic and diluted loss per common share. Basic loss per commonshare is computed by dividing loss available to common stockholders by thenumber of weighted average common shares outstanding, and includes all commonstock issued.  Diluted earnings wouldinclude all common stock equivalents. The Company has not included the outstanding options, warrants or sharesissuable upon conversion of the convertible debt as common stock equivalents inthe computation of diluted loss per share for the six months ended June 30,2009 and 2008 because the effect would be antidilutive.

 

Thefollowing table sets forth the weighted average shares issuable upon exerciseof outstanding options and warrants and conversion of convertible debt that arenot included in the basic and diluted loss per share available to commonstockholders because to do so would be antidilutive:

 
| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                              | ** ** | **June 30**       | ** ** | **June 30**     | ** ** |
| ** **                                                              | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                    |       |                   |       |                 |       |   |   |   |   |
| Weighted  average shares issuable upon exercise of outstanding options  |       | 2,595,618              |       | 2,120,073            |       | 2,522,399 |   | 2,132,305 |   |
|                                                                    |       |                   |       |                 |       |   |   |   |   |
| Weighted  average shares issuable upon exercise of outstanding warrants |       | 773,442                |       | 397,885              |       | 741,302 |   | 414,442 |   |
|                                                                    |       |                   |       |                 |       |   |   |   |   |
| Weighted  average shares issuable upon conversion of convertible debt   |       | 714,286                |       | 714,286              |       | 714,286 |   | 714,286 |   |
|                                                                    |       |                   |       |                 |       |   |   |   |   |
| Total                                                                   |       | 4,083,346              |       | 3,232,244            |       | 3,977,987 |   | 3,261,033 |   |

 

 

***Note 8 - Warranty Obligations***

 

TheCompany warrants to the purchasers of its products that the product will befree of defects in material and workmanship for one year from the date ofinstallation.  In addition, somecustomers have purchased extended warranties for the Company’s products thatextend the base warranty.  The Companyrecords the estimated cost that may be incurred under its warranties at thetime revenue is recognized based upon the

 

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Lime Energy Co.

Notes to Condensed Consolidated Financial Statements

 

relationshipbetween historical and anticipated warranty costs and sales volumes.  The Company periodically assesses theadequacy of its recorded warranty liability and adjusts the amounts asnecessary.  While the Company believesthat its estimated warranty liability is adequate and that the judgment appliedis appropriate, the estimated liability for warranties could differ materiallyfrom actual future warranty costs.

 

Changesin the Company’s warranty liability are as follows:

 
| ** **                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Balance  at the beginning of the period |       | $        | 208,863    |     | $          | 377,902 |   |
|                                    |       |     |       |     |       |
| Warranties  issued                      |       | 3,300    |       | 19,100   |       |
|                                    |       |     |       |     |       |
| Settlements                             |       | (176,163 | )          | (64,906  | )          |
|                                    |       |     |       |     |       |
| Balance,  as of June 30            |       | $        | 36,000     |     | $          | 332,096 |   |

 

***Note 9 - Inventories***

 

Inventoriesconsisted of the following:

 
| **As of**                 | ** ** | **June 30, 2009** | ** **    | **December 31, 2008** |   |
|---------------------------|------------|------------------------|---------------|----------------------------|--------|
|                      |       |                   |          |                       |   |
| Raw  materials            |       | $                      | 143,392       |                       | $      | 666,883 |   |
|                      |       |                   |          |                       |   |
| Reserve  for obsolescence |       | —                 |          | (1,838                     | )      |
|                      |       |                   |          |                       |   |
|                      |       | $                      |  143,392 |                       | $      | 665,045 |   |

 

***Note 10 — Revolving Line of Credit***

** **

OnMarch 12, 2008, the Company entered into a $3 million revolving line ofcredit note with Advanced Biotherapy, Inc. (“ADVB”) and Richard Kiphart,the Company’s chairman and largest individual investor.  On June 6, 2008 and August 14, 2008the note and related documents were amended to increase the size of the line to$16 million with Mr. Kiphart increasing his commitment under his note to$14,500,000 from $1,500,000.  On October 31,2008 the note and related documents with ADVB were amended to increase itscommitment from $1.5 million to $4.5 million. On November 14, 2008, Mr. Kiphart agreed to convert his noteinto shares of the Company’s Series A-1 preferred stock.  On November 18, 2008, the Companyentered an agreement to acquire 90.8% of the shares of ADVB and it completed ashort-form merger on March 3, 2009, whereby it merged ADVB with a newly createdacquisition subsidiary.  Following themerger it canceled the outstanding balance of $42,029 and accrued interest of$51,797 on the ADVB line of credit. Please refer to Note 3 for additional information regarding the ADVBacquisition.

 

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Lime Energy Co.

Notesto Condensed Consolidated Financial Statements

 

***Note 11 — Subordinated Convertible Term Notes***

 

Duringthe second quarter of 2007, eight investors, including Richard Kiphart, theCompany’s Chairman and largest individual stockholder (collectively the “Investors”),and the Company entered into a loan agreement under which the Investors lentthe Company $5 million in the form of subordinated convertible term notes (the “TermNotes”).  The Term Notes mature on May 31,2010, although they may be prepaid at any time after May 31, 2008 at theCompany’s option without penalty, and accrue interest at the rate of 10% peryear.  Interest is payable quarterly, 50%in cash and 50% in shares of the Company’s common stock valued at the marketprice of the Company’s common stock on the interest due date.  The Term Notes are convertible at any time atthe Investors’ election at $7.00 per share and will automatically convert toshares of common stock at $7.00 per share, if, at any time after May 31,2008 the closing price of the Company’s common stock exceeds $10.50 per sharefor 20 days in any consecutive 30-day period. The loan agreement provides for acceleration upon the occurrence oftypical events of default, including nonpayment, nonperformance, bankruptcy andcollateral impairment.

 

Aspart of the transaction, the Company issued the Investors four-year warrants topurchase 206,044 shares of its common stock at $7.28 per share.  These warrants were valued at $1,136,537utilizing a modified Black-Scholes option pricing model utilizing the followingassumptions: risk free rate of 4.846%; expected volatility of 93.3%; expecteddividend of $0; and expected life of four years.

 

Theshares issued as part of the quarterly interest payments and issuable uponconversion of the term loan or exercise of the warrants will not be registeredfor resale, though the Company has given the Investors the right to demand theCompany use its best efforts to file as soon as practicable a registrationstatement to register a minimum of 142,857 issued shares.

 

Inrecording the transaction, the Company allocated the value of the proceeds tothe Term Notes and warrants based on their relative fair values.  In doing so, it determined that the TermNotes contained a beneficial conversion feature since the fair market value ofthe common stock issuable upon conversion of the Term Notes (determined on theTerm Note issuance date) exceeded the value allocated to the Term Notes of$3,863,463.  The Term Notes areconvertible into 714,286 shares of common stock, which at the market price of$8.02 per share on date of issuance of the Term Notes was worth $5,730,000.  The difference between the market value ofthe shares issuable upon conversion and the value allocated to the Term Notesof $1,866,537 is considered to be the value of the beneficial conversionfeature.

 

Thevalue of the beneficial conversion feature and the value of the warrants havebeen recorded as a discount to the Term Notes and are being amortized over theterm of the Term Notes using the effective interest method.  Amortization of the discount of $248,888 wasincluded in interest expense during the three-month periods ended June 30,2009 and 2008, respectively.

 

Inaddition, the Company incurred costs of $8,572 relative to the Term Noteoffering.  These costs have beencapitalized and are also being amortized over the term of the Term Notes usingthe effective interest method. Amortization of the deferred issuance costs of $711 and $711 wasincluded in interest expense during the three-month periods ended June 30,2009 and 2008, respectively.

 

Pleasesee Note 17 for subsequent events affecting the Subordinated Convertible TermNotes.

 

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Lime Energy Co.

Notesto Condensed Consolidated Financial Statements

 

***Note 12 — The November 2008 PIPE Transaction***

 

On November 13,2008, the Company entered into Subscription Agreements with 15 investors tosell 1,787,893 units, each comprised of one share of the Company’s common stockand a warrant to purchase an additional quarter share of common stock (the “Units”).  The sale price was $3.51 per Unit, which isequal to 75% of the volume-weighted average price of the Company’s stock forthe ten days prior to closing.  Thewarrants allow holders to purchase a share of common stock for $4.10 per share,which was the closing price of the Company’s common stock on the day prior tothe closing, and the warrants are exercisable any time after May 13, 2009and before November 13, 2011.  Thetotal gross proceeds raised in the offering totaled $6,275,500.

 

The private offeringclosed in two tranches: tranche A, which was comprised of unaffiliatedinvestors; and tranche B which was comprised of affiliated investors, primarilyexecutive officers and directors of the Company.  The Company raised $3,000,500 in tranche A,which closed on November 13, 2008 and $3,275,000 in tranche B, whichclosed on January 30, 2009. The issuance of the Units sold in tranche Brequired approval by holders of a majority of the Company’s outstanding votingstock pursuant to the NASDAQ Marketplace Rules. The Company received the written consent in lieu of a meeting ofstockholders from the holders of shares representing 58.7% of the totaloutstanding shares of its common stock on November 13, 2008, which wassufficient under the General Corporation Law of the State of Delaware and theCompany’s By-Laws to approve the transaction.

 

Securities and ExchangeCommission rules require that any corporate actions requiring thestockholder approval that are approved pursuant to a written consent in lieu ofa meeting be communicated to all stockholders via an Information Statement andthat the corporate action so approved cannot take place until at least 20 daysfollowing the mailing or giving of the Information Statement tostockholders.  The Company mailed anInformation Statement to all of its stockholders on December 31, 2008informing them of the November 13, 2008 written consent in lieu of ameeting.

 

***Note 13 — Preferred Stock***

 

OnNovember 14, 2008, Richard Kiphart agreed to convert his $14.5 millionrevolving line of credit note and $207,104 of accrued interest into 358,710shares of Series A-1 preferred stock. Each outstanding share of preferred stock is entitled to cumulativequarterly dividends at a rate of (i) 15% per annum of its stated value(which is $41.00) on or prior to March 31, 2009 (9% in cash and 6% inadditional shares of preferred stock); and (ii) 17% per annum of itsstated value, at any time on or after April 1, 2009 (9% in cash and 8% inadditional shares of preferred stock). The preferred stock is convertible at the holder’s election any timeafter December 31, 2009 into shares of the Company’s common stock at therate of 10 shares of common stock for each share of preferred stock.  The Company can redeem the preferred stock atany time at a premium to the stated value. The redemption premium was 11% through June 30, 2009, after whichit increased to 12%. The holder of the Series A-1 preferred stock voteswith the Company’s common stockholders on an as converted basis.  Mr. Kiphart and Mr. Valentine haveagreed to recuse themselves from any vote of the Board of Directors withrespect to a redemption or repurchase of the Series A-1 preferred stock.

 

Pleasesee Note 17 for subsequent events affecting the Series A-1 PreferredStock.

 

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Lime Energy Co.

Notesto Condensed Consolidated Financial Statements

 

***Note 14 — Business Segment Information***

 

The Company hashistorically segregated its results into three distinct reporting segments: theEnergy Efficiency Services segment; the Energy Technology segment and theFinancial Services segment.  As a resultof the decision to sell the Energy Technology segment, it has reported itsoperating results as discontinued operations. The Financial Services segment, which was established in late 2007 toenable the Company’s commercial and industrial customers to pay for serviceprovided by the Energy Efficiency Services segment has not grown asexpected.  Since the Financial Servicessegment exists exclusively in support of the Energy Efficiency Services segmentand does not represent a material portion of the Company’s revenue or assets,management views the Financial Services segment to be part of the EnergyEfficiency Services segment and, therefore it considers all of the Company’scontinuing operations to be part of one operating segment.

 

***Note 15 — Other Equity Issuances***

 

(a)         During the first six monthsof 2009, the Company issued 29,735 shares of its common stock to the holders ofits subordinated convertible term notes in satisfaction of 50% of the interestowed on the notes.

 

(b)         During the first six monthsof 2009, the Company issued 8,233 shares of its Series A-1 preferred stockin partial satisfaction of dividends owed the holder.

 

***Note 16 — Related Party Transactions***

 

OnJanuary 30, 2009, the Company closed on tranche B of the SubscriptionAgreements dated November 13, 2008 between the Company and seven investorsaffiliated with the Company.  Theinvestors in this private transaction included Richard Kiphart, the Company’sChairman, David Asplund, the Company’s Chief Executive Officer, Daniel Parke,the Company’s President, Jeffrey Mistarz, the Company’s Chief FinancialOfficer, and Gregory Barnum and David Valentine, members of the Company’s Boardof Directors.  For additional informationregarding this transaction please refer to Note 12 above.

 

Asis more fully described in Note 3 above, in March 2009, the Companyacquired all of the outstanding shares of Advanced Biotherapy, Inc., acompany in which Mr. Kiphart, the Company’s Chairman and largestindividual stockholder, owned approximately 80% of the common stock and servedas the chairman of its board of directors. Mr. David Valentine, one of the Company’s directors, was also adirector and stockholder of Advanced Biotherapy.

 

SeeNote 17 for related party transactions occurring subsequent to quarter-end.

 

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Lime Energy Co.

Notesto Condensed Consolidated Financial Statements

 

***Note 17 — Subsequent Events***

 

OnAugust 12, 2009, the Company filed a registration statement to register5,000,000 shares of its common stock with the intent of selling the shares inan underwritten public offering.  TheCompany will use the proceeds to repay certain outstanding debt and for othergeneral corporate purposes, including working capital.

 

OnAugust 10, 2009, to facilitate the anticipated public offering of itscommon stock, the Company and Mr. Kiphart converted his Series A-1preferred stock into 3,777,705 shares of its common stock and $3.1 million ofthe Company’s convertible subordinated notes into 4,264,759 shares of itscommon stock.    Following theseconversions the Company had 17,354,461 shares of common stock and no shares of Series A-1Preferred outstanding and $1.9 million of its Convertible Subordinated Notesoutstanding.

 

OnAugust 10, 2009, the Company and the holders of its ConvertibleSubordinated Notes with a principal amount of $1.9 million agreed to amend thenotes to require their conversion to common stock upon the closing of theunderwritten public offering at the lower of the offering price theunderwriters discount and the current conversion price of the notes of $7.00per share.  All of the holders of thesubordinated convertible notes have elected to convert their notes.

 

OnAugust 10, 2009, the Company and Mr. Kiphart entered into a $2million revolving bridge line.  Thebridge line note matures on February 10, 2010 and bear interest at 17% perannum, with 12% payable quarterly in cash, with the remaining 5% to be capitalizedand added to the principal balance on the note. The Company will be required to pay a minimum of three months intereston any borrowings under the bridge line. The note also requires the quarterly payment of an unused funds fee of7% per annum on the unused portion of the note. The Company may borrow any amount, at any time during the term of thebridge line as long as it is not in default at the time of the advance,provided that the total advances under the bridge line, net of repayments, maynot exceed $2 million.  If the Companyterminates the note before its scheduled maturity it will owe Mr. Kiphartthe difference between $70,000 and any interest and unused line fees paid.

 

OnAugust 10, 2009, the Company sold certain assets of its Energy Technologysegment which was operated by MPG. Please refer to Note 5 for information regarding this transaction.

 

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| ITEM 2. | **MANAGEMENT’S DISCUSSION  AND ANALYSIS**OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS |
|---------|-----------------------------------------------------------------------------------------------|

** **

Youshould read the following discussion regarding the Company along with ourfinancial statements and related notes included in this quarterly report.  This quarterly report, including thefollowing discussion, contains forward-looking statements that are subject torisks, uncertainties and assumptions. Our actual results, performance and achievements in 2009 and beyond maydiffer materially from those expressed in, or implied by, these forward-lookingstatements.  See Cautionary NoteRegarding Forward-Looking Statements.

 

**Overview**

 

We are a leading provider ofintegrated energy engineering, consulting and implementation solutionsspecializing in improving the energy efficiency of our clients’ facilities,reducing their operating costs and carbon emissions.  We focus on two specific markets: thecommercial and industrial market, including utilities, and the public sectormarket, working primarily with energy service companies (“ESCOs”).  Our clients include commercial and industrialbusinesses, property owners and managers, utilities, and ESCOs serving U.S.government and educational institutions. We focus on deploying solutions to reduce the energy-related expendituresof our client’s facilities and the impact of their energy use on theenvironment, including energy efficient lighting upgrades, energy efficiencymechanical and electrical retrofit and upgrade services, water conservation,weatherization and renewable project development and implementation.  We provide energy efficiency solutions acrossall of our clients’ facilities, ranging from high-rise office buildings tomanufacturing plants, retail sites, mixed use complexes and large, governmentsites to small, local facilities.

 

Weoffer turnkey Energy Efficiency Services comprising**:**

 

**·**                  *Energy Engineering andConsulting*:  We apply our engineering expertise to analyzeeach client’s energy consumption and operational needs and develop customizedenergy efficiency and renewable energy solutions.  Our energy engineering and consultingservices include sustainability consulting, energy master planning, projectdevelopment services, design engineering and building e-commissioning.  We also provide design review and analysis ofnew construction projects to maximize energy efficiency and sustainability,project management of energy-related construction, and processing andprocurement of incentive and rebate applications.

** **

**·**                  *Implementation:*  Weprovide complete turnkey implementation services for a range of energyefficiency and renewable energy projects, including energy efficient lightingupgrades, energy efficiency mechanical and electrical retrofit and upgradeservices, water conservation, weatherization and renewable project developmentand implementation, including solar, biomass and geothermal.  We consider factors such as current facilityinfrastructure, best available technologies, building environmental conditions,hours of operation, energy costs, available utility rebates and tax incentives,and installation, operation and maintenance costs of various efficiencyalternatives.  Our professionals’extensive knowledge in energy efficiency solutions enables us to apply the mostappropriate, effective and proven technologies available in the marketplace.

** **

We serve a wide range of commercial, industrial andpublic sector clients.  Our commercialand industrial clients include many Fortune 500 companies for which we provideour energy efficiency solutions directly, as well as utilities for which wemanage energy efficiency portfolio projects. Our public sector clients includegovernment agencies and educational institutions, which we serve both throughour 

 

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relationships with ESCOs and directly.  ESCOs are awarded project contracts with thepublic sector as prime contractors, and we provide energy efficiency expertiseto develop and implement tailored solutions under these contracts.

 

In March 2009 we began the process of selling our MaximumPerformance Group, Inc. subsidiary, which formerly made up our EnergyTechnology business segment in order to focus on our core Energy EfficiencyServices business.  The Energy Technologysegment, which represented approximately 4% of our 2008 revenue, offers apatented line of heating, ventilation and air conditioning and lightingcontrollers under the eMAC and uMAC brand names. The eMAC technology providesremote monitoring, management and control of commercial rooftop HVAC units. TheuMAC technology is a version of the eMAC that remotely controls the operationof a facility’s lights via wireless communications.  In August 2009, we came to agreementwith a buyer to sell certain assets of MPG, including the eMAC and uMACtechnologies.

 

**Results of Operations**

 

*Revenue*

 

Wegenerate the majority of our revenue from the sale of our services and the productsthat we purchase and resell to our clients.  The substantial majority of our revenue is derived from fixed-pricecontracts, although we occasionally bill on a time-and-materials basis. Underfixed-price contracts, we bill our clients for each project once the project iscompleted or throughout the project as specified in the contract. Undertime-and-materials arrangements, we bill our clients on an hourly basis withmaterial costs and other reimbursable expenses passed through and recognized asrevenue. Historically, our projects have typically been completed within one tothree weeks, with the exception of a few multi-month projects. With theaddition of AEM, the number of multi-month projects have increasedsignificantly, as historically, AEM’s projects have typically taken four toeight months to complete. All of our revenue is earned in the United States.

 

*Gross Profit*

 

Gross profit equals our revenue less costs ofsales. The cost of sales for our business consists primarily of materials, ourinternal labor, including engineering, and the cost of subcontracted labor.

 

Gross profit is a key metric that we use toexamine our performance. Gross profit depends in part on the volume and mix ofproducts and services that we sell during any given period. A portion of ourexpenses, such as the cost of certain salaried project management andengineering personnel, are relatively fixed. Accordingly, an increase in thevolume of sales will generally result in an increase to our margins since thesefixed expenses are not expected to increase proportionately with sales. Ourbusiness is also seasonal, as such, our margins will vary with seasonal changesin our revenue due to the fixed nature of some of our costs.

 

23

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*Selling, General andAdministrative Expenses*

 

Selling,general and administrative expenses (“SG&A”) include the followingcomponents:

 

·      direct labor and commissioncosts related to our employee sales force;

 

·      costs of our non-productionmanagement, supervisory and staff salaries and employee benefits, including thecosts of stock-based compensation;

 

·      costs related to insurance,travel and entertainment, office supplies and utilities;

 

·      costs related to marketingand advertising our products;

 

·      legal and accountingexpenses; and

 

·      costs related toadministrative functions that serve to support our existing businesses, as wellas to provide the infrastructure for future growth.

 

*Amortization of Intangibles*

 

Whenwe acquire companies we allocate the purchase price to tangible assets (such asproperty, equipment, accounts receivable, etc.), intangible assets (such ascontract backlogs, customer lists, technology, trade name, etc.) andgoodwill.  We amortize the value ofcertain intangible assets over their estimated useful lives as a non-cashexpense.

 

*Other Expense*

 

Otherexpense consists of interest expense, net of interest earned on ourinvestments. Interest expense represents the interest costs and fees associatedwith our subordinated convertible term notes (including amortization of therelated debt discount and issuance costs), our lines of credit, the mortgage onour headquarters building, notes payable and various vehicle loans. Interestincome includes earnings on our invested cash balances and amortization of thediscount on our long term receivables.

 

*DividendExpense*

 

Dividendexpense includes dividends accrued on our Series A-1 preferred stock.

 

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**Three months Ended June 30, 2009 Compared to Threemonths Ended June 30, 2008**

 

***Consolidated Results***

 
| ** **                                 | ** ** | **Three  Months Ended June 30** | ** **       | **Change  from Historical** | ** ** | **Change  from Pro forma** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------------|-----------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | ** **                           | ** **       | **2008**                    | ** ** | **2008**                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **2009**                             | ** **       | **Historical**              | ** ** | **Pro  forma (1)**         | ** ** | **$ ** | ** ** | **%** | ** ** | **$ ** | ** ** | **%** | ** ** |
|                                       |       |                                 |             |                        |       |                       |       |   |   |   |   |   |   |   |   |
| Revenue                                    |       | $                                    |  15,795,187 |                        | $          |  6,377,908            |       | $ |  10,155,103 |   | $ |  9,417,279 |   | 147.7 | % | $ |  5,640,084 |   | 55.5 | % |
| Cost  of sales                             |       | 12,952,804                           |             | 5,474,757                   |       | 8,786,029                  |       | 7,478,047 |   | 136.6 | % | 4,166,775 |   | 47.4 | % |
| Gross  profit                              |       | 2,842,383                            |             | 903,151                     |       | 1,369,074                  |       | 1,939,232 |   | 214.7 | % | 1,473,309 |   | 107.6 | % |
|                                       |       |                                 |             |                        |       |                       |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative       |       | 5,549,345                            |             | 3,831,502                   |       | 5,886,208                  |       | 1,717,843 |   | 44.8 | % | (336,863 | ) | -5.7 | % |
| Amortization  of intangibles               |       | 313,288                              |             | 274,816                     |       | 627,546                    |       | 38,472 |   | 14.0 | % | (314,258 | ) | -50.1 | % |
| Operating  Loss                            |       | (3,020,250                           | )                | (3,203,167                  | )          | (5,144,680                 | )          | 182,917 |   | -5.7 | % | 2,124,430 |   | -41.3 | % |
|                                       |       |                                 |             |                        |       |                       |       |   |   |   |   |   |   |   |   |
| Other  income (expense)                    |       | (396,616                             | )                | (521,160                    | )          | (826,701                   | )          | 124,544 |   | -23.9 | % | 430,085 |   | -52.0 | % |
| Loss  from continuing operations           |       | (3,416,866                           | )                | (3,724,327                  | )          | (5,971,381                 | )          | 307,461 |   | -8.3 | % | 2,554,515 |   | -42.8 | % |
|                                       |       |                                 |             |                        |       |                       |       |   |   |   |   |   |   |   |   |
| Loss  from discontinued operations         |       | (636,895                             | )                | (806,262                    | )          | (806,262                   | )          | 169,367 |   | -21.0 | % | 169,367 |   | -21.0 | % |
| Net  loss                                  |       | $                                    |  (4,053,761 | )                           | $          |  (4,530,589           | )          | $ |  (6,777,643 | ) | $ |  476,828 |   | -10.5 | % | $ |  2,723,882 |   | -40.2 | % |
|                                       |       |                                 |             |                        |       |                       |       |   |   |   |   |   |   |   |   |
| Preferred  stock dividends                 |       | (646,396                             | )                | —                      |       | —                     |       | (646,396 | ) | — |   | (646,396 | ) | — |   |
| Net  loss available to common stockholders |       | $                                    |  (4,700,157 | )                           | $          |  (4,530,589           | )          | $ |  (6,777,643 | ) | $ |  (169,568 | ) | 3.7 | % | $ |  2,077,486 |   | -30.7 | % |

 

----

*(1) Assuming the acquisition of Applied EnergyManagement, Inc. had taken place on January 1, 2008*

 

The following table presents the percentage ofcertain items to revenue:

 
| ** **                                 | ** ** | **Three Months Ended June 30** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | ** **                          | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                 | ** ** | **2009**                            | ** ** | **Historical** | ** ** | **Pro forma (1)** | ** ** |
|                                       |       |                                |       |   |   |   |   |
| Revenue                                    |       | 100.0                               | %          | 100.0 | % | 100.0 | % |
| Cost  of sales                             |       | 82.0                                | %          | 85.8 | % | 86.5 | % |
| Gross  profit                              |       | 18.0                                | %          | 14.2 | % | 13.5 | % |
|                                       |       |                                |       |   |   |   |   |
| Selling,  general and administrative       |       | 35.1                                | %          | 60.1 | % | 58.0 | % |
| Amortization  of intangibles               |       | 2.0                                 | %          | 4.3 | % | 6.2 | % |
| Operating  Loss                            |       | -19.1                               | %          | -50.2 | % | -50.7 | % |
|                                       |       |                                |       |   |   |   |   |
| Other  income (expense)                    |       | -2.5                                | %          | -8.2 | % | -8.1 | % |
| Loss  from continuing operations           |       | -21.6                               | %          | -58.4 | % | -58.8 | % |
|                                       |       |                                |       |   |   |   |   |
| Loss  from discontinued operations         |       | -4.0                                | %          | -12.6 | % | -7.9 | % |
| Net  loss                                  |       | -25.7                               | %          | -71.0 | % | -66.7 | % |
|                                       |       |                                |       |   |   |   |   |
| Preferred  stock dividends                 |       | -4.1                                | %          | 0.0 | % | 0.0 | % |
| Net  loss available to common stockholders |       | -29.8                               | %          | -71.0 | % | -66.7 | % |

 

----

*(1) Assuming the acquisitionof Applied Energy Management, Inc. had taken place on January 1, 2008*

 

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***Revenue.***  Our revenue for the three months ended June 30,2009 was $15,795,187, representing a 147.7%, or $9,417,279 increase over the$6,377,908 earned in the three months ended June 30, 2008.  Our revenue increased $5,640,084 or 55.5%over the second quarter 2008 pro forma revenue of $10,155,103.   The increase in revenue was due to continuedimprovement in the productivity of our salespeople and continued strongcustomer interest in energy efficiency services.  We expect to record more moderate growth inour quarterly revenue when compared to 2008 results for the balance of2009.  Our revenue is also expected tocontinue to be somewhat seasonal, with between 60% and 70% of our revenueearned in the second half of the year.

 

***Gross Profit. ***Our gross profit for the three-month period ended June 30, 2009 was$2,842,383, a $1,939,232 increase over the $903,151 earned during the sameperiod in 2008.  Our gross profitincreased $1,473,309, or 107.6% when compared to the $1,369,074 earned on a proforma basis during the second quarter of 2008. Our gross profit margin for the second quarter of 2009 was 18.0%compared to 14.2% for the second quarter of 2008 on a historical basis and13.5% on a pro forma basis.  The improvementsin our gross profit and gross profit margin were the result of the increase inrevenue leveraging certain fixed costs contained in our cost of sales and anincrease in the average margin earned on completed projects.  We believe that our gross profit margin willincrease moderately with expected increases in revenue during the second halfof the year.

 

***Selling, General and Administrative Expense. ***OurSG&A for the second quarter of 2009 was $5,549,345, an increase of$1,717,843, or 44.8%, compared to the $3,831,502 for the same period during2008.  Our SG&A decreased $336,863 or5.7%, from $5,886,208 for the second quarter 2008 on a pro forma basis.  The inclusion of three months of expense forAEM, which was acquired in June 2008, was responsible for the majority ofthe increase over the historical SG&A expense.  Share based compensation expense included inSG&A declined approximately $499,000 from both the historical and pro formaexpense for 2008.  This was partiallyoffset by increases in franchise taxes, outside consulting fees, includinglegal, marketing, IT and compensation, and labor expense.  Our SG&A was 35.1% of revenue during thesecond quarter of 2009 as compared to 60.1% for the same period in 2008 and58.0% during the second quarter of 2008 on a pro forma basis.  This reduction in SG&A as a percentage ofrevenue was due to our ability to reduce our SG&A expense by 5.7% from 2008pro forma levels while increasing revenue by 55.5%.   We expect our quarterly SG&A expense toincrease slightly during the balance of the year, due primarily toannualization of 2008 new hires and selective additions to our engineering andsales staffs.

 

***Amortization of Intangibles.***  Amortization expense associated with ourintangible assets was $313,288 during the second quarter of 2009, an increaseof $38,472 when compared to the $274,816 for the second quarter of 2008.  This increase was the result of theacquisition of AEM in June 2008. Amortization expense declined $314,258 from 2008 pro forma secondquarter expense of $627,546. Amortization expense is expected to decline to $256,737 and $256,737 foreach of the remaining quarters of 2009 as certain intangible assets becomefully amortized.

 

***Other Non-Operating (Expense) Income.***  Other expense declined $124,544or 23.9% to $396,616 during the second quarter of 2009 compared to $521,160 forthe second quarter of 2008.  Interestexpense was $426,874 for the second quarter of 2009, a decline of $107,510 whencompared to $534,384 for the second quarter of 2008.  The components of interest expense for thethree-month periods ended June 30, 2009 and 2008 are as follows:

 

26

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| ** **                                                 | ** ** | ** ** | ** **    | **2008**       | ** ** | **2008**      | ** **   |
|------------------------------------------------------------|------------|------------|---------------|----------------|------------|---------------|--------------|
| **Three  months ended June 30,**                      | ** ** | **2009**   | ** **    | **Historical** | ** ** | **Pro forma** | ** **   |
|                                                       |       |       |          |           |       |          |         |
| Lines  of credit                                           |       | $          |  —  |           | $          |  139,974 |         | $ |  401,684 |   |
| Note  payable                                              |       | 26,214     |          | 11,214         |       | $             |  41,394 |   |
| Mortgage                                                   |       | 4,161      |          | 6,701          |       | 6,701         |         |
| Subordinated  convertible notes                            |       | 124,657    |          | 125,022        |       | 125,022       |         |
| Other                                                      |       | 22,243     |          | 2,584          |       | 16,235        |         |
|                                                       |       |       |          |           |       |          |         |
| Total  contractual interest                                |       | $          |  177,275 |           | $          |  285,495 |         | $ |  591,036 |   |
|                                                       |       |       |          |           |       |          |         |
| Amortization  of deferred issuance costs and debt discount |       | 249,599    |          | 248,889        |       | 248,889       |         |
|                                                       |       |       |          |           |       |          |         |
| Total  interest expense                                    |       | $          |  426,874 |           | $          |  534,384 |         | $ |  839,925 |   |

 

Total contractual interest (the interest on outstandingloan balances) decreased $108,220 during the second quarter of 2009 to $177,275from $285,495 during the second quarter of 2008.  The decrease was the result of the conversionof the line of credit to preferred stock at the end of 2008.  This reduction was partially offset byincreased interest on our notes payable and vehicle loans due to the debtassumed as part of the acquisition of AEM. Contractual interest expense for the second quarter declined $413,761when compared to the pro forma contractual interest expense of $591,036.  The pro forma interest on the line of creditincludes pro forma interest on the $4.5 million used to acquire AEM and the $2million injected into AEM to support its working capital needs.

 

Interest income increased $17,034 to $30,258 duringthe second quarter of 2009, from $13,224 during the first quarter of 2008.  During the fourth quarter of 2007 we beganoffering certain customers extended payment terms.  We are required to discount these receivablesat a market rate of interest and amortize the discount over the term of theextended payments as interest income.  Westopped offering extended payment terms in late 2008 in order to conservecapital for other working capital needs. The average balance of these receivables was higher during the secondquarter of 2009 than during the year earlier period, contributing to theincrease in interest income for the period.

 

***Discontinued Operations.***  The loss from discontinued operationsdeclined $169,367 or 21.0% to $636,895 for the second quarter of 2009 from$806,262 for the second quarter of 2008. Reductions in research and development costs and labor costs werepartially offset by a $503,407 impairment charge related to our decision toreduced the carrying value of certain assets in anticipation of the sale of theEnergy Technology segment.

 

27

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Table of Contents

 

**Six months Ended June 30, 2009 Compared to Six monthsEnded June 30, 2008**

 

***Consolidated Results***

 
| ** **                                 | ** ** | **Six Months Ended June 30** | ** **       | **Change from Historical** | ** ** | **Change from Pro forma** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------------|----------------------------|------------|---------------------------|------------|
| ** **                                 | ** ** | ** **                        | ** **       | **2008**                   | ** ** | **2008**                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **2009**                          | ** **       | **Historical**             | ** ** | **Pro forma (1)**         | ** ** | **$ ** | ** ** | **%** | ** ** | **$ ** | ** ** | **%** | ** ** |
|                                       |       |                              |             |                       |       |                      |       |   |   |   |   |   |   |   |   |
| Revenue                                    |       | $                                 |  29,519,945 |                       | $          |  8,624,744           |       | $ |  18,761,416 |   | $ |  20,895,201 |   | 242.3 | % | $ |  10,758,529 |   | 57.3 | % |
| Cost  of sales                             |       | 23,872,726                        |             | 7,688,012                  |       | 16,089,225                |       | 16,184,714 |   | 210.5 | % | 7,783,501 |   | 48.4 | % |
| Gross  profit                              |       | 5,647,219                         |             | 936,732                    |       | 2,672,191                 |       | 4,710,487 |   | 502.9 | % | 2,975,028 |   | 111.3 | % |
|                                       |       |                              |             |                       |       |                      |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative       |       | 10,781,982                        |             | 6,821,421                  |       | 11,027,389                |       | 3,960,561 |   | 58.1 | % | (245,407 | ) | -2.2 | % |
| Amortization  of intangibles               |       | 658,201                           |             | 381,666                    |       | 1,263,491                 |       | 276,535 |   | 72.5 | % | (605,290 | ) | -47.9 | % |
| Operating  Loss                            |       | (5,792,964                        | )                | (6,266,355                 | )          | (9,618,689                | )          | 473,391 |   | -7.6 | % | 3,825,725 |   | -39.8 | % |
|                                       |       |                              |             |                       |       |                      |       |   |   |   |   |   |   |   |   |
| Other  income (expense)                    |       | (839,875                          | )                | (860,977                   | )          | (1,574,968                | )          | 21,102 |   | -2.5 | % | 735,093 |   | -46.7 | % |
| Loss  from continuing operations           |       | (6,632,839                        | )                | (7,127,332                 | )          | (11,193,657               | )          | 494,493 |   | -6.9 | % | 4,560,818 |   | -40.7 | % |
|                                       |       |                              |             |                       |       |                      |       |   |   |   |   |   |   |   |   |
| Loss  from discontinued operations         |       | (1,029,223                        | )                | (1,636,630                 | )          | (1,636,630                | )          | 607,407 |   | -37.1 | % | 607,407 |   | -37.1 | % |
| Net  loss                                  |       | $                                 |  (7,662,062 | )                          | $          |  (8,763,962          | )          | $ |  (12,830,287 | ) | $ |  1,101,900 |   | -12.6 | % | $ |  5,168,225 |   | -40.3 | % |
|                                       |       |                              |             |                       |       |                      |       |   |   |   |   |   |   |   |   |
| Preferred  stock dividends                 |       | (1,202,185                        | )                | —                     |       | —                    |       | (1,202,185 | ) | — |   | (1,202,185 | ) | — |   |
| Net  loss available to common stockholders |       | $                                 |  (8,864,247 | )                          | $          |  (8,763,962          | )          | $ |  (12,830,287 | ) | $ |  (100,285 | ) | 1.1 | % | $ |  3,966,040 |   | -30.9 | % |

 

----

*(1) Assuming the acquisition of Applied EnergyManagement, Inc. had taken place on January 1, 2008*

 

The following table presents the percentage ofcertain items to revenue:

 
| ** **                                 | ** ** | **Six Months Ended June 30** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                 | ** ** | ** **                        | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                 | ** ** | **2009**                          | ** ** | **Historical** | ** ** | **Pro forma (1)** | ** ** |
|                                       |       |                              |       |   |   |   |   |
| Revenue                                    |       | 100.0                             | %          | 100.0 | % | 100.0 | % |
| Cost  of sales                             |       | 80.9                              | %          | 89.1 | % | 85.8 | % |
| Gross  profit                              |       | 19.1                              | %          | 10.9 | % | 14.2 | % |
|                                       |       |                              |       |   |   |   |   |
| Selling,  general and administrative       |       | 36.5                              | %          | 79.1 | % | 58.8 | % |
| Amortization  of intangibles               |       | 2.2                               | %          | 4.4 | % | 6.7 | % |
| Operating  Loss                            |       | -19.6                             | %          | -72.7 | % | -51.3 | % |
|                                       |       |                              |       |   |   |   |   |
| Other  income (expense)                    |       | -2.8                              | %          | -10.0 | % | -8.4 | % |
| Loss  from continuing operations           |       | -22.5                             | %          | -82.6 | % | -59.7 | % |
|                                       |       |                              |       |   |   |   |   |
| Loss  from discontinued operations         |       | -3.5                              | %          | -19.0 | % | -8.7 | % |
| Net  loss                                  |       | -26.0                             | %          | -101.6 | % | -68.4 | % |
|                                       |       |                              |       |   |   |   |   |
| Preferred  stock dividends                 |       | -4.1                              | %          | 0.0 | % | 0.0 | % |
| Net  loss available to common stockholders |       | -30.0                             | %          | -101.6 | % | -68.4 | % |

 

----

*(1) Assuming the acquisitionof Applied Energy Management, Inc. had taken place on January 1, 2008*

 

28

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***Revenue.***  Our revenue for the six months ended June 30,2009 increased $20,895,201, or 242.3%, to $29,519,945 as compared to the$8,624,744 recorded during the first six months of 2008.   Our revenue increased $10,758,529, or 57.3%,over the pro forma revenue for the first six months of 2008.  The increase over pro forma revenue was dueto continued strong demand for our energy efficiency services, particularly forpublic projects, and improved productivity of our sales people.

 

***Gross Profit. ***Our gross profit for the first six months of 2009 was $5,647,219, a$4,710,487, or 502.9% increase over the gross profit of $936,732 earned duringthe same period in 2008.  Our grossprofit increased $2,975,028, or 111.3%, over the pro forma gross profit of$2,672,191 for the first six months of 2008. Our gross margin for the first half of 2009 was 19.1%, compared to 10.9%for 2008 on a historical basis and 14.2% on a pro forma basis.  The improvements in our gross profit andgross profit margin were the result of the increase in revenue leveragingcertain fixed costs contained in our cost of sales and an increase in theaverage margin earned on completed projects.

 

***Selling, General and Administrative Expense.***  Our SG&A expense was$10,781,982 for the first six months of 2009, an increase of $3,960,561, or58.1% compared to the first six months of 2008 on a historical basis.  This increase was largely due to theinclusion of six months of AEM’s SG&A expense during the 2009 period.  Our SG&A declined $245,407, or 2.2%, whencompared to the first half of 2008 on a pro forma basis.  A decline of $901,885 in share basedcompensation was partially offset by increases in labor expense, outsideconsulting fees, including legal, marketing, IT and compensation, and higherfranchise taxes.

 

***Amortization of Intangibles.***  Amortization expense increased $276,535, or72.5% to $658,201 during the first six months of 2009 compared to $381,666 forthe first six months of 2008 on a historical basis.   The 2009 period included six months ofamortization of the intangibles associated with the acquisition of AEM, whichclosed in June 2008.  On a pro formabasis amortization expense declined $605,290, or 47.9%.  Amortization expense will continue to declineas the underlying intangible assets become fully amortized.

 

***Other Non-Operating (Expense) Income.***  Other expense increased $21,102or 2.5% to $839,875 during the first half of 2009 compared to $860,977 for theyear earlier period on a historical basis. Interest expense was $902,815 for the first six months of 2009, adecrease of $15,287 when compared to $918,102 for the first six months of2008.  The components of interest expensefor the six-month periods ended June 30, 2009 and 2008 are as follows:

 

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| ** **                                                 | ** ** | ** ** | ** **    | **2008**       | ** ** | **2008**      | ** ** |
|------------------------------------------------------------|------------|------------|---------------|----------------|------------|---------------|------------|
| **Six  months ended June 30,**                        | ** ** | **2009**   | ** **    | **Historical** | ** ** | **Pro forma** | ** ** |
| ** **                                                 | ** ** | ** ** | ** **    | ** **     | ** ** | ** **    | ** ** |
| Lines  of credit                                           |       | $          |  52,668  |           | $          |  139,974 |       | $ |  728,947 |   |
| Note  payable                                              |       | 52,981     |          | 11,214         |       | 115,700       |       |
| Mortgage                                                   |       | 8,362      |          | 14,924         |       | 14,924        |       |
| Subordinated  convertible notes                            |       | 247,944    |          | 250,050        |       | 250,050       |       |
| Other                                                      |       | 44,404     |          | 4,163          |       | 24,695        |       |
|                                                       |       |       |          |           |       |          |       |
| Total  contractual interest                                |       | $          |  406,359 |           | $          |  420,325 |       | $ |  1,134,316 |   |
|                                                       |       |       |          |           |       |          |       |
| Amortization  of deferred issuance costs and debt discount |       | 496,456    |          | 497,777        |       | 497,777       |       |
|                                                       |       |       |          |           |       |          |       |
| Total  interest expense                                    |       | $          |  902,815 |           | $          |  918,102 |       | $ |  1,632,093 |   |

 

Our contractual interest expense declined $13,966during the first six months of 2009 to $406,359 from $420,325 for the sameperiod in 2008.  A decline in theinterest on our line of credit was largely offset by the inclusion of sixmonths of interest on AEM’s debt during 2009.

 

***Discontinued Operations.***  The loss from discontinued operationsdeclined $607,407 or 37.1% to $1,029,223 for the first six months of 2009 from$1,636,630 for the same period in 2008. Reductions in research and development costs and labor expense were partiallyoffset by a $503,407 impairment charge as we reduced the carrying value ofcertain assets in anticipation of the sale of this segment.

 

**Liquidity and Capital Resources**

 

Asof June 30, 2009, we had cash and cash equivalents of $4,673,040, comparedto $3,733,540 on December 31, 2008. Our debt obligations as of June 30,2009 consisted of $5,000,000 of convertible subordinated notes, a note payableto a former stockholder of AEM and current Director of Lime of $1,303,858, anote payable to a bank of $2,115,775, a mortgage of $436,000 on our facility inElk Grove Village Illinois and various vehicle loans totaling $351,887.  Subsequent to the end of our second quarterthe following events occurred which will affect our future liquidity andcapital resources:

 

·      Weannounced our intent to raise capital through a public offering of ourstock.  The proceeds from this offeringwill be used to repay the $3.4 million in notes due to the former stock holderof AEM and to a bank and for other general corporate purposes;

·      OnAugust 10, 2009, Mr. Kiphart converted all of his preferred stockinto shares of common stock, thereby eliminating our future dividendobligations;

·      OnAugust 10, 2009, Mr. Kiphart converted $3.1 million of subordinatedconvertible notes and accrued interest payable in shares of common stock into487,054 shares of common stock;

·      Wecame to agreement with all of the holders of the remaining $1.9 million ofour subordinated convertible debt to convert their notes into shares of ourcommon stock at the lower of the debt’s current conversion price of $7.00 pershare or the price at which the public offering is completed, less theunderwriters’ discount.  This willeliminate the repayment obligation associated with this debt which is scheduledto mature in May 2010; and

·      Wearranged a $2 million bridge line of credit with Mr. Kiphart to provideadditional liquidity in the event it is needed during the period prior to thecompletion of the public offering.

 

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Ourprincipal cash requirements are for operating expenses, the funding ofinventory and accounts receivable, and capital expenditures. We have financedour operations since inception primarily through the private placement of ourcommon and preferred stock, as well as through various forms of secured debt.

 

Thefollowing table summarizes, for the periods indicated, selected items in ourconsolidated statement of cash flows:

 
| **Six  months ended June 30,**                   | ** ** | **2009**  | ** ** | **2008**   | ** ** |
|-------------------------------------------------------|------------|-----------|------------|------------|------------|
|                                                  |       |      |       |       |       |
| Net  cash used in operating activities                |       | $         | (6,089,559 | )          | $          | (7,071,630 | ) |
| Net  cash used in investing activities                |       | (804,688  | )          | (3,852,664 | )          |
| Net  cash provided by financing activities            |       | 7,833,747 |       | 6,617,965  |       |
|                                                  |       |      |       |       |       |
| Net  Increase (Decrease) in Cash and Cash Equivalents |       | $         | 939,500    |       | $          | (4,306,329 | ) |
|                                                  |       |      |       |       |       |
| Cash  and Cash Equivalents, at beginning of period    |       | 3,733,540 |       | 4,780,701  |       |
|                                                  |       |      |       |       |       |
| Cash  and Cash Equivalents, at end of period          |       | $         | 4,673,040  |       | $          | 474,372 |   |

 

**Six months Ended June 30, 2009 Compared to Six monthsEnded June 30, 2008**

 

Netcash increased $939,500 during the first six months of 2009 as compared todecreasing $4,306,329 during the same period in 2008.

 

*OperatingActivities*

 

Operatingactivities consumed cash of $6,089,559 during the six-month period ended June 30,2009 as compared to consuming cash of $7,071,630 during the same period of2008.

 

Whethercash is used or generated by operating activities is a function of theprofitability of our operations and changes in working capital.  To get a better understanding of cash sourcesand uses, our management separates the cash used or provided by operatingactivities into two categories: the cash consumed (or generated) by operatingactivities before changes in working capital; and the cash consumed (orgenerated) from changes in working capital.

 

Thecash consumed by operating activities before changes in working capitaldeclined $1,783 to $5,297,416 during the first six months of 2009 as comparedto consuming $5,299,199 during the first six months of 2008.  The reduction in the cash consumption was theresult of the reduction in the cash operating loss (excluding depreciation,amortization and share based compensation) and the reduced loss fromdiscontinued operations.  We believe thatwe will continue to see improvements in the cash consumed by operatingactivities before changes in working capital if our revenue and profitabilityimprove as we believe they will, such that we expect our operations willgenerate cash before changes in working capital during the second half of theyear.

 

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Changesin working capital consumed cash of $792,143 during the first six months of2009, a reduction of $980,288, or 55.3%, when compared to consuming $1,772,431during the same period in 2008.  Thereduced use of cash for working capital during 2009 was primarily the result ofreceivable collections generated from strong sales in the fourth quarter of2008.  We expect our working capitalrequirements to increase with increases in our sales in future periods, thoughwe hope improvements in our receivables turnover will keep the growth inworking capital to a rate that is lower than the growth of our future sales.

 

*InvestingActivities*

 

Cashused in investing activities decreased $3,047,976, or 79.1% to $804,688 duringthe six-month period ended June 30, 2009 from $3,852,664 for the sameperiod in 2008.  During the first half of2009 we paid $613,898 for the AEM earn-out and costs associated with theacquisition of AEM.  We also made capitalexpenditures of $201,962 for service vehicles and office equipment during thefirst half of 2009.  During the first sixmonths of 2008 we purchased AEM and made capital purchases totaling$135,912.  We do not expect to makesignificant expenditures for fixed assets for the balance of the year.

 

*FinancingActivities*

 

Financingactivities generated cash of $7,833,747 during the first six months of 2009 ascompared to generating $6,617,965 during the first six months of 2008.  In March 2009 we closed on theacquisition of ADVB and gained access to its cash balances of $7.4million.  We have treated this acquisitionas an offering because we acquired ADVB to gain access to its cash.  We do not intend to continue to operate thecompany as a going concern.  In January 2009we closed on tranche B of the November 2008 PIPE, generating cash proceedsof $3,275,000.  The proceeds from thesetwo transactions were partially offset by a $1,850,000 net pay down on our lineof credit; $795,879 in transaction costs related primarily to the acquisitionof ADVB; and $233,555 in scheduled principal payments on our debt.  During the first half of 2008 we drew$3,500,000 on our line of credit to fund the acquisition of AEM, $2,000,000 tofund an equity infusion into AEM to assist with its working capitalrequirements and $1.5 million to fund other operating needs.  We borrowed $25,372 to fund the purchase of anew truck and received $103,821 from the exercise of options and warrants.  These sources of cash were partially offsetby $521,025 used to repay a portion of our long term debt.

 

**SOURCESOF LIQUIDITY**

 

Ourprimary sources of liquidity are our available cash reserves of $4,673,040 andour $2 million bridge line of credit obtained in August 2009.

 

Ourability to continue to expand our sales will require the continued commitmentof significant funds. The actual timing and amount of our future fundingrequirements will depend on many factors, including the amount and timing offuture revenues, working capital requirements and the level and amount of oursales and marketing efforts, among other things.

 

Wehave raised a significant amount of capital since our formation through theissuance of shares of our common and preferred stock and notes, which hasallowed us to acquire companies and to continue to execute our businessplan.  Most of these funds have beenconsumed by operating activities, either to fund our losses or for workingcapital requirements.  In an attempt tomove the Company to a position where it can start to generate positive cashflow our management has set the following key strategies for cash flowimprovement in 2009:

 

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·                  Focus on increasing thesales and profitability of our products and services.  We believe that to a great degree our abilityto generate positive cash flow is dependent on our ability to increase saleswhile controlling the growth of our SG&A and maintaining or improving ourgross margins.  Our revenue in the fourthquarter of 2008 was $29 million, exceeding the amount earned in any priorquarterly period.  It was also the only quarterin our history in which our cash earnings (earnings excluding depreciation,amortization and share based compensation) exceeded our interest and dividendexpense.  We believe that our currentinfrastructure can support a sales level that will generate positive cashearnings on a full year basis.  We alsobelieve there are opportunities to improve our margins, which will help toreduce the level of sales at which we will begin to generate positive cash flowbefore changes in working capital.

 

·                  Sell or shut down our EnergyTechnology Business.  We made thedecision in early 2009 to sell this business segment to eliminate this sourceof losses and allow us to focus on our growing Energy Efficiency business.  We began the process of seeking a buyer forthis business during the first quarter of 2009 and closed on the sale on August 10,2009.  The sale has been structured as anearnout in which the buyer must achieve minimum revenue levels before we wouldbe eligible for any payment.  We do notanticipate receiving any earnout payments before late 2010 at the earliest.

 

Webelieve that if we are successful in increasing our revenue while controllingthe growth in our operating expenses and completing the recently announcedpublic offering, we should have sufficient liquidity to allow us to operateuntil our operations turn cash flow positive. If we are not able to complete the offering, we may begin to experiencea liquidity shortage perhaps as early as the latter half of 2009 which couldforce us to seek other means of raising capital.

 

**Cautionary Note Regarding Forward-Looking Statements**

 

Ourdisclosure and analysis in this report, including Management’s Discussion andAnalysis of Financial Condition and Results of Operations contains “forward-looking”information within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, adopted pursuant to the Private Securities Litigation Reform Act of1995. Statements that are not purely historical may be forward-looking. You canidentify these forward-looking statements by the use of words such as “anticipate,”“believe,” “estimate,” “expect,” “hope,” “intend,” “may,” “project,” “plan,”  “should,” and similar expressions, includingwhen used in the negative.

 

Forward-lookingstatements are subject to various risks and uncertainties. Accordingly, thereare or will be important factors that could cause actual results to differmaterially from those indicated in these statements, including but not limitedto the following:

 

·                  we have a limited operatinghistory under our current business model in a rapidly evolving market, whichmay make it difficult to evaluate our business and prospects, and may expose usto increased risks and uncertainties;

·                  we have incurred significantoperating losses since inception and may not achieve or sustain profitabilityin the future;

·                  unavailability of additionalfunding may impair our growth;

·                  the current economicdownturn could diminish the demand for our services and products;

·                  it is difficult for us toestimate our future quarterly results;

 

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·                  we operate in a highlycompetitive industry and if we are unable to compete successfully our revenue;and profitability will be adversely affected;

·                  the success of our businessdepends on the market acceptance of our energy efficient solutions; and

·                  we may be unable to obtainsufficient bonding capacity to support certain service offerings.

 

Allforward-looking statements in this report should be considered in the contextof the risk and other factors described above and as detailed from time to timein the Company’s Securities and Exchange Commission filings. Anyforward-looking statements speak only as of the date the statement is made andwe undertake no obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise. It is notpossible to identify all of the risks, uncertainties and other factors that mayaffect future results. In light of these risks and uncertainties, theforward-looking events and circumstances discussed in this report may not occurand actual results could differ materially from those anticipated or implied inthe forward-looking statements. Accordingly, users of this report are cautionednot to place undue reliance on the forward-looking statements.

 

Exceptas otherwise required by federal securities laws, we do not undertake anyobligation to publicly update, review or revise any forward-looking statements,whether as a result of new information, future events, changed circumstances orany other reason.

 

ITEM 3.                                       **Quantitativeand Qualitative Disclosures About Market Risk**

 

Notapplicable.

 

ITEM 4.                                       **Controlsand Procedures**

 

**DisclosureControls and Procedures.**

 

Ourmanagement, including our chief executive officer and our chief financialofficer, maintains our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) and has evaluated the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based on such evaluation, our chief executiveofficer and chief financial officer have concluded that, as of June 30,2009, such disclosure controls and procedures are effective for the purpose ofensuring that material information required to be in the reports that wesubmit, file, furnish or otherwise provide to the Securities and ExchangeCommission is accumulated and communicated to our management, including ourchief executive officer and chief financial officer, as appropriate to allowtimely decisions regarding required disclosure.

 

**Changesin Internal Controls.**

 

Therehave not been any changes in our internal control over financial reporting (asdefined in Rule 13a-15(f) under the Exchange Act) during the quarterended June 30, 2009 that have materially affected or are reasonably likelyto materially affect our internal control over financial reporting.

 

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**Limitationsof the Effectiveness of Internal Control**

A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the internal control system are met.  Because of the inherent limitations of anyinternal control system, no evaluation of controls can provide absoluteassurance that all control issues, if any, within a company have been detected.

 

**PART II.  OTHER INFORMATION**

 

ITEM 2.                                       **Unregistered Sales ofEquity Securities and Use of Proceeds**

 
| (1)    | On  January 30, 2009, we issued 933,049 unregistered shares of our common  stock along with warrants to purchase an additional 233,263 shares of our  common stock at $4.10 per share to seven affiliated investors in exchange for  gross proceeds of $3,275,000. Proceeds from this offering will be used for  general corporate purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (2)    | On  March 3, 2009, we exchanged 2,252,341 unregistered shares of our common  stock for 1,060,421,884 shares of Advanced Biotherapy, Inc. (“ADVB”)  held by stockholders of ADVB (the “Sellers”) representing approximately 90.8%  of ADVB’s issued and outstanding shares pursuant to a Stock Purchase  Agreement dated November 18, 2008. We then completed a short-form merger  in which we merged ADVB with and into a newly formed merger subsidiary, with  the merger subsidiary remaining as the surviving entity. Upon the closing of  the merger we obtained access to ADVB’s assets, including approximately $7.4  million of cash and a Revolving Credit Note we issued that had an outstanding  balance of approximately $42,000. We cancelled the Revolving Credit Note and  do not plan to continue to operate ADVB as a going concern after the closing.  We plan to use the cash obtained in the acquisition for general corporate  purposes. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (3)    | During  the first quarter of 2009 we issued 63,052 unregistered shares of our common  stock to the former owners of Applied Energy Management, Inc. following  determination of the amounts owed under an earn-out provision of the AEM  purchase agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (4)    | During  the first six months of 2009, we issued 29,735 unregistered shares of our  common stock to the holders of our subordinated convertible term notes in  satisfaction of 50% of the interest owed to them.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | No  underwriters were involved in the transaction described above. All of the  securities issued in these transactions were issued by us in reliance upon  the exemption from registration available under Section 4(2) of the  Securities Act, including Regulation D promulgated thereunder, in that the  transactions involved the issuance and sale of our securities to financially  sophisticated individuals or entities that were aware of our activities and  business and financial condition and took the securities for investment  purposes and understood the ramifications of their actions. Certain of the  purchasers also represented that they were “accredited investors” as defined  in Regulation D and were acquiring such securities for investment for their  own account and not for distribution.                                                                                                                                                          |

 

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ITEM 4.                                       **Submissionof Matters to a Vote of Security Holders**

 

OnJune 3, 2009, we held our annual meeting of stockholders.  At the annual meeting, eight nominees to ourBoard of Directors were elected to hold office for a one year term ending atour 2009 annual meeting of stockholders or until their respective successorswere duly elected and qualified.  Thenumber of directors has been set at twelve by resolution of the Board.

 

Asof the record date, there were 13,067,038 shares of our common stock eligibleto be voted and 366,943 shares of Series A-1 eligible to vote on an asconverted basis at the rate of 10 votes per share.  Of the 16,736,468 common-share equivalentshares eligible to vote, 13,268,226 shares or 79% were represented in personor by proxy at our annual meeting. The directors elected included Messrs. DavidR. Asplund, Gregory T. Barnum, William R. Carey, Joesph F. Desmond, Richard P.Kiphart, Daniel W. Parke and David W. Valentine, who were all of the nominees,with results for each director as follows:

 
| **Director**          | ** ** | **For**    | ** ** |
|-----------------------|------------|------------|------------|
| David R. Asplund      |       | 12,759,742 |       |
| Gregory T. Barnum     |       | 13,263,375 |       |
| Christopher W. Capps  |       | 12,758,983 |       |
| William R. Carey, Jr. |       | 13,249,441 |       |
| Joseph F. Desmond     |       | 13,268,226 |       |
| Richard P. Kiphart    |       | 12,732,127 |       |
| Daniel W. Parke       |       | 12,759,942 |       |
| David W. Valentine    |       | 12,736,023 |       |

 

**Proposals and VoteTabulations**

 
| ** **                                                                   | ** ** | **Votes Cast** | ** ** |
|------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                   | ** ** | **For**        | ** ** | **Against** | ** ** |
| **Management Proposals**                                                     |       |           |       |   |   |
|                                                                         |       |           |       |   |   |
| To authorize a reduction in the number of authorized shares of common  stock |       | 13,262,274     |       | 12,434 |   |
| Ratification of selection of independent auditors for 2009                   |       | 13,265,261     |       | 2,691 |   |

 

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ITEM 6.                                       **Exhibits**

 
| 31.1   | Certificate  of Chief Executive Officer pursuant to Securities Exchange Act  Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                |
| 31.2   | Certificate  of Chief Financial Officer pursuant to Securities Exchange Act  Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                |
|   |                                                                                                                                                                                                                |
| 32.1   | Certification  of the Chief Executive Officer of the Corporation Pursuant to  Section 1350 of Chapter 63 of Title 18 of the United States Code  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |                                                                                                                                                                                                                |
| 32.2   | Certification of the Chief  Financial Officer of the Corporation Pursuant to Section 1350 of Chapter  63 of Title 18 of the United States Code Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

#### **SIGNATURES**

####  

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                         | LIME ENERGY  CO.: |
|------------------------------|-------------------|
|                         |              |   |
|                         |              |   |
| Dated:  August 12, 2009 | By:               | /s/  David Asplund |
|                         |              | David  Asplund |
|                         |              | *Chief Executive Officer (principal executive officer)* |
|                         |              |   |
|                         |              |   |
| Dated:  August 12, 2009 | By:               | /s/  Jeffrey Mistarz |
|                         |              | Jeffrey  Mistarz |
|                         |              | *Chief Financial Officer (principal financial and  accounting officer)* |

 

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